A) In late 2012 the inflation rate in the U.S. was about 2%. In the Wall...

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A) In late 2012 the inflation rate in the U.S. was about 2%. In the Wall Street Journal, a columnist wrote: "Someone buying long-term bonds yielding 1.5% or 2%, and then seeing consumer price inflation of 4%, will be on the losing end of the bet." a. Explain what will happen to the price of bonds if the expected inflation rate increases to 4% from 2%. Include a demand and supply graph of the bond market. b. Suppose that you expect a greater increase in inflation than do other investors, but that you don't expect the increase to occur until 2015. Should you wait until 2015 to sell your bonds? Briefly explain. c. The columnist also argued that long-term bonds would be a good investment only if "we get serious price deflation." Explain the effect on bond prices if investors decide that price deflation is likely to occur. How would an unexpected deflation affect the rate of return on your investment in bonds? d. If expected inflation is increasing, would you have made a worse investment if you had invested in long-term bonds than if you had invested in short-term bonds? A) In late 2012 the inflation rate in the U.S. was about 2%. In the Wall Street Journal, a columnist wrote: "Someone buying long-term bonds yielding 1.5% or 2%, and then seeing consumer price inflation of 4%, will be on the losing end of the bet." a. Explain what will happen to the price of bonds if the expected inflation rate increases to 4% from 2%. Include a demand and supply graph of the bond market. b. Suppose that you expect a greater increase in inflation than do other investors, but that you don't expect the increase to occur until 2015. Should you wait until 2015 to sell your bonds? Briefly explain. c. The columnist also argued that long-term bonds would be a good investment only if "we get serious price deflation." Explain the effect on bond prices if investors decide that price deflation is likely to occur. How would an unexpected deflation affect the rate of return on your investment in bonds? d. If expected inflation is increasing, would you have made a worse investment if you had invested in long-term bonds than if you had invested in short-term bonds?

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A a If the expected inflation rate increases to 4 the price of bonds will decrease due to a decrease ... View the full answer