Question #8
Reading: Reading 39 Economics and Investment Markets
PDF File: Reading 39 Economics and Investment Markets.pdf
Page: 3
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
If the market expects inflation to decrease over the next few years but the uncertainty about inflation was increasing, the break-even inflation rate is most likely to:
Answer Choices:
A. Increase
B. Decrease
C. Be uncertain
Explanation
BEI = expected inflation + risk premium for uncertainty about inflation. While inflation is
expected to decrease, the higher inflation uncertainty increases the risk premium. Hence
the overall impact is uncertain.