Everyone uses money, and it is important to understand what factors affect the cost of money. Consider the following scenario:
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

A

Explanation:

Inflation is a persistent rise in general price level. Investors usually factor in inflation levels when making investment decisions. they demand rates of return based on the expected inflation. This rate of return is known as a nominal rate of return

Types of inflation

1. Demand-pull inflation :This is when the demand for good exceeds the supply of the goods. As a result the price of the good increases

2. Cost push inflation : this type of inflation is caused as a result of an increase in the cost of goods used in the production of goods and services

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