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Q: Consider the following statements:
- Inlation benefits the debtors.
- Inflation benefits the bond-holders.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Correct Answer: Option (a)
- For debtors, “real” interest rate goes down with inflation. Thus, it benefits them. On the other hand, with inflation the yield of bonds goes down, thus a negative effect for bond-holders. Hence, option (a) is correct.
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