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Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?


More than it does today

Less than today

Exactly the same


If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?


Stay the same

Fall

No relationship

Rise

Verified Answer :

The money in the account would buy less than it does today. The inflation would make the prices more expensive because the money in the account will not rise by the same rate.

If interest rates rise, bond prices will fall. They have an inverse relationship.

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