An investor expecting decrease in aggregate demand should increase investment in investment-grade and government fixed income security in anticipation of decreasing interest rates
Stagflation: increasing inflation and high unemployment.
Investor expecting stagflation should decrease investment in fixed income securities in anticipation of higher inflation and nominal interest rates.
In both cases demand curve shifts to left (decreasing demand)
My question is why interest rates incresase in stagflation? I thought government would intervene and ideally decrease interest rates to boost the demand…
The U.S. has a silly Fed mandate that contradicts itself in a period of stagflation, so I can understand your confusion. But rates would ideally increase to combat the inflation piece of stagflation.
Today, I’m not so sure that would happen in “real life.” Economic thought seems to be shifting towards some kind of socialist bent where jobs and growth and poor people owning huge houses and having massive debt takes precedence over the injustice of higher inflation. Many folks are calling for a short term burst of high inflation (through lower rates/QE) in order to spur growth.
This is an awful idea full of moral hazard, but it certainly could explain your confusion in dealing with this kind of question.