Civil Services Prep

Prelims 2013 · Economy · Question 16

Consider the following statements:<br/>1. Inflation benefits the debtors.<br/>2. Inflation benefits the bond-holders.<br/><br/>Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Answer

1 only

  1. Inflation benefits the debtors — Correct. With inflation, the real value of money falls, so borrowers repay loans in money that is worth less than when they borrowed it.

  2. Inflation benefits the bond-holders — Incorrect. Bond-holders usually receive fixed interest and principal, whose real value declines during inflation; inflation hurts creditors holding fixed-income assets.

Therefore, only statement 1 is correct.

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