Consider a consol with a coupon yield of $10. The consumer price
index unexpectedly rises from 120, where it had been constant for
a number of years to 140 where it remains constant indefinitely.
The nominal interest rate is 6 percent both before and after the
unexpected price level change. Comparing the situation before
and after the price level change, we should find that the price
of the bond
1. remained the same but its real value declined.
2. declined along with its real value.
3. declined but its real value remained the same.
4. and its real value remained unchanged because neither
the rate of interest nor the permanent rate of inflation changed.
Choose the correct option.