question archive Suppose that both the supply and demand for bonds depended only on the after-tax expected real interest rate, which is independent of the expected inflation rate
Suppose that both the supply and demand for bonds depended only on the after-tax expected real interest rate, which is independent of the expected inflation rate
Subject:BusinessPrice: Bought3
Suppose that both the supply and demand for bonds depended only on the after-tax expected real interest rate, which is independent of the expected inflation rate. What is the effect of higher expected inflation on the bond market? (Hint: Because taxes are imposed on nominal interest income, bond demanders pay the tax, and bond suppliers have their taxes reduced by an equal amount because they can deduct the interest expense.) How does the amount of tax paid change when actual inflation is higher than expected inflation? Who gains and who loses from inflation?
