Consider the following statements: 1. Inflation benefits the debtors

by

Consider the following statements:

  • 1. Inflation benefits the debtors.
  • 2. Inflation benefits the bond-holders.

Which of the statements given above is/are correct?

1 only
2 only
Both 1 and 2
Neither 1 nor 2
This question was previously asked in
UPSC IAS – 2013
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The correct answer is A) 1 only. Statement 1 is correct, while statement 2 is incorrect.
Inflation is the decline of purchasing power of a given currency over time. When there is inflation, the real value of money decreases. Statement 1: Debtors benefit from inflation because the fixed amount of money they owe becomes less valuable in real terms when they repay it later. Statement 2: Bondholders (creditors) are typically harmed by inflation because the fixed interest payments they receive and the principal amount they get back at maturity are worth less in real terms due to the decreased purchasing power of money.
Inflation essentially redistributes wealth from creditors to debtors if the nominal interest rate is less than the inflation rate (resulting in a negative real interest rate). Fixed-income earners, savers, and people holding cash also tend to lose during periods of high inflation, while those with flexible incomes or assets that appreciate faster than inflation may benefit or be protected.

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