In August 2010, an article in the Wall Street Journal observed: In the bond market . . . investors have been flocking to all manner of [bonds] . . . from Treasuries to "junk" bonds. The attraction: steady interest payments which would become increasingly valuable if deflation were to take hold.
a. Why would the interest payments on bonds become more "valuable" if deflation were to occur?
b. If deflation occurred, would the nominal interest rates on these bonds be higher or lower than the real interest rates? Briefly explain.