Question

Due to recent political and economic events, general prices of goods and services are expected to increase significantly over the next five years. You were about to purchase a five-year bond. You now require a higher return on the bond than you did before you found out about these expected price increases.

Determine which of these fundamental factors is affecting the cost of money in the scenario described:

a. Inflation
b. Time preferences for consumption
c. Risk

Answer 1

a. Inflation

Step-by-step explanation:

In the context of economics, inflation refers to the increase in the price of goods and services

Moreover, we also know that

(1 + Nominal rate of return) = (1 + real rate of return) × (1 + inflation rate of return)

According to the given situation, it is mentioned that The general goods and services prices are expected to rise substantially over the next five years which represents the concept of inflation

Hence, the option a is correct