Question at position 20 If inflation expectations increase, bond yields will generally:RiseStay constantFallBecome negative单项选择题
A
Rise
B
Stay constant
C
Fall
D
Become negative

Question

Question at position 20 If inflation expectations increase, bond yields will generally:RiseStay constantFallBecome negative

BlackTom AI · Accepted Answer

Higher expected inflation increases nominal bond yields through the Fisher effect: nominal yield ≈ real yield + expected inflation.

1) Relevant knowledge points and concepts
- Fisher equation: i = r + πe (i: nominal interest rate/yield, r: real interest rate, πe: expected inflation).
- Inflation expectations reduce the real purchasing power of fixed nominal payments; investors demand compensation via higher nominal yields.
- Bond prices and yields move inversely: if investors expect inflation, existing bonds with lower coupons become less attractive, their prices fall and yields rise.

2) Step-by-step reasoning
- Start with the Fisher equation: i = r + πe.
- Assume a given real rate r (driven by real economic factors). If πe increases and r is unchanged, i must increase to keep the equality.
- Market mechanism: investors will sell/avoid nominal bonds whose future cash flows will be worth less in real terms when inflation is higher. Selling lowers bond prices, which increases yield to maturity.

3) Example calculation (intermediate steps)
- Suppose r = 2% and initial πe = 2% → i = 2% + 2% = 4%.
- If expected inflation rises to 4% (πe = 4%) and r stays 2% → i = 2% + 4% = 6%.
- Nominal yield rises from 4% to 6% as expected inflation rises.

4) Why the correct answer is correct
- The Fisher effect directly links higher inflation expectations to higher nominal yields; investors require higher interest to offset expected loss of purchasing power. Market trading (falling prices) enforces the increase in yields.

5) Why other options are incorrect
- Stay constant: would require a simultaneous offsetting fall in real rates equal to the inflation rise, which is not the normal direct effect of higher πe alone.
- Fall: contradicts the Fisher relationship and investor incentive to demand higher yields when inflation expectation rises.
- Become negative: higher inflation expectations make negative nominal yields even less likely; negative yields are associated with extreme deflation expectations or policy distortions, not rising inflation expectations.

6) Conclusion
Therefore, the correct answer is Rise, which matches the provided answer.

Question at position 20 If inflation expectations increase, bond yields will generally:RiseStay constantFallBecome negative单项选择题

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