Consider the following statements : 1. Inflation benefits the debtors. 2. Inflation benefits the bondholders. Which of the statements given above is/are correct?
Correct answer: A
Explanation
Statement 1 is correct: When prices rise, the real value of money decreases. Debtors repay their loans with money that has less purchasing power than when they borrowed it. Therefore, debtors gain because the real burden of debt falls.
Statement 2 is incorrect: Bondholders (lenders) receive fixed interest payments. During inflation, the real value of these payments decreases, as money loses purchasing power. Thus, bondholders lose during inflation.