Question
Consider the following statements:Â 1) Inflation
benefits the debtors. 2) Inflation benefits the bondholders. Which of the statements given above is/are correct?ÂSolution
Statement 1: Inflation benefits the debtors — TRUE When prices rise (inflation), the real value of money falls. If a debtor has taken a loan, they repay it later with money that is worth less in real terms. Thus, inflation benefits debtors. Statement 2: Inflation benefits the bondholders — FALSE Bondholders receive fixed interest payments. During inflation, the purchasing power of these fixed returns declines, so they lose in real terms.
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