Final answer:
An increase in expected inflation decreases bond demand and increases their supply, demonstrating the inflation expectation effect. A rising money supply from the Federal Reserve can initially boost GDP and lower unemployment but may lead to higher inflation long term.
Step-by-step explanation:
An increase in expected inflation tends to decrease the demand for bonds, because the fixed returns they provide will be worth less in real terms when inflation is higher. Conversely, this scenario also increases the supply of bonds because issuers want to lock in current lower rates before they rise in response to inflation. This phenomenon is known as the inflation expectation effect on bonds. When the Federal Reserve increases the money supply at an increasing rate, it can lead to higher Gross Domestic Product (GDP) and lower unemployment in the short run; however, over the long term, it may contribute to higher inflation rates.