Consider the following statements : 1. Inflation benefits the debtors. 2. Inflation benefits the bond-holders. Which of the statements given above is/are correct?
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UPSC Civil Services preparation
- A(a) 1 onlyCorrect
- B(b) 2 only
- C(c) Both 1 and 2
- D(d) Neither 1 nor 2
Explanation
Correct Answer: A) (a) 1 only
Let's break down why:
Statement 1: Inflation benefits the debtors. This is correct. Inflation reduces the real value of money. Debtors repay their loans with money that is worth less than the money they borrowed. Therefore, inflation effectively reduces the burden of debt.
Statement 2: Inflation benefits the bond-holders. This is incorrect. Bondholders receive fixed interest payments. If inflation rises, the real value of those fixed payments decreases. Their purchasing power is eroded. Inflation negatively impacts bondholders.
Therefore, only statement 1 is correct.
Why other options are incorrect:
B) 2 only: Incorrect as explained above.
C) Both 1 and 2: Incorrect because statement 2 is false.
D) Neither 1 nor 2: Incorrect because statement 1 is true.
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