Question
Consider the following statements :
1. Inflation benefits the debtors.
2. Inflation benefits the bond-holders.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer:
A
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Explanation:
Inflation benefits the debtors. When there is inflation, the value of money decreases over time. If someone has borrowed money at a fixed interest rate, the real value of the debt decreases as inflation rises. This means that debtors can repay their loans with money that is less valuable in real terms. Inflation reduces the burden of debt for borrowers.
On the other hand, inflation is not beneficial for bond-holders. As inflation rises, the purchasing power of the interest and principal payments received from bonds decreases. This can lead to a decrease in the real value of investment returns for bond-holders.