Question at position 14 Everything else equal, if inflation is expected to decrease, the yieldlowers because the demand curve for bonds shifts to the left and the supply curve of bonds stays the same.lowers because the supply curve of bonds shifts to the right and the demand curve for bonds to the left.lowers because the demand curve for bonds shifts to the right and the supply curve of bonds to the left.rises because the demand curve for bonds shifts to the right less than the supply curve of bonds.rises because the supply curve of bonds shifts to the left and the demand curve for bonds stays the same.

Question

BlackTom AI · Accepted Answer

Expected inflation falls, so the nominal return investors require on bonds declines (by the Fisher relation: nominal rate ≈ real rate + expected inflation). For a given real return, a lower expected inflation means a lower nominal yield will be consistent with the same real return.

Relevant concepts:
- Fisher equation linking nominal interest rates, real interest rates, and expected inflation.
- Bond demand rises when expected real returns increase or when inflation risk falls.
- Bond supply (issuance) falls when borrowing becomes relatively more expensive in real terms.
- Bond price and yield move inversely: higher bond prices correspond to lower yields.

Step-by-step reasoning:
1. Expected inflation decreases. By the Fisher relation, if real rates are unchanged, the nominal yield investors require falls.
2. Investors anticipate higher real purchasing power of interest payments, so holding bonds becomes more attractive. This increases the demand for bonds — shift the demand curve to the right.
3. Issuers (governments/firms) face a higher real cost of borrowing when inflation expectations drop, so they have less incentive to issue new bonds. That reduces bond supply — shift the supply curve to the left.
4. A rightward demand shift and a leftward supply shift both raise bond prices. Because yield is inversely related to price, yields fall.

Why the correct option is correct:
- The option stating the yield lowers because demand shifts right and supply shifts left matches the economic mechanisms above: higher demand and reduced supply both push up price and thus lower yields.

Why other choices are incorrect:
- Demand shifting left or supply shifting right would lower prices and raise yields — opposite of the expected effect.
- Any answer claiming yields rise contradicts the Fisher implication and the combined shifts described.
- The option with only supply shifting left but demand unchanged would still lower yields (not raise them), so the phrasing claiming a rise is wrong.

Conclusion: The yield lowers because the demand curve shifts to the right and the supply curve shifts to the left, which matches the provided correct answer.

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类似问题

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