Explanation

An increase in expected inflation typically leads to:

• Higher nominal interest rates (to compensate for the erosion of purchasing power)
• Higher discount rates (not lower, so option B is incorrect)
• Lower asset values because future cash flows are discounted at higher rates, reducing their present value

Risk premiums (option C) are generally not directly affected by expected inflation changes in the way described. The primary impact is on asset valuations through the discount rate mechanism.

Correct Answer: A - Asset values decrease as higher inflation expectations lead to higher discount rates, reducing the present value of future cash flows.