Question
Consider the following statements : Codes :
I. Inflation is advantageous to debtors.
II. Inflation is advantageous to the bond-holders.
Which of the statements given above is/are correct ?
The correct answer is
I only
Analyzing Inflation's Impact on Debtors and Bondholders
The question asks to evaluate the effect of inflation on debtors and bondholders based on two statements.
Statement I: Inflation is advantageous to debtors.
- Debtors borrow money and are obligated to repay a fixed amount later.
- Inflation erodes the purchasing power of money over time.
- If the inflation rate is higher than the interest rate on the debt, the real value of the amount the debtor has to repay decreases.
- This makes it easier for the debtor to repay the loan in terms of real purchasing power.
- Therefore, Statement I is correct.
Statement II: Inflation is advantageous to the bond-holders.
- Bondholders lend money and typically receive fixed interest payments and the principal amount back at maturity.
- Inflation reduces the purchasing power of these fixed future payments.
- If inflation is high, the real return earned by the bondholder (the fixed interest received minus the inflation rate) diminishes, or can even become negative.
- This leads to a loss in the real value of their investment.
- Therefore, Statement II is incorrect.
Conclusion
Based on the analysis, only Statement I is correct. Inflation benefits debtors as the real value of their debt decreases, while it generally harms bondholders due to the erosion of purchasing power of their fixed returns.
Thus, the correct option is the one stating that only Statement I is correct.
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Important Questions from Macroeconomics
- Real-factor demand-pull inflection can be caused by:
A. Increase in investment
B. Decrease in consumer demand
C. Decrease in imports given the exports
D. Decrease in exports given the imports
E. Decrease in government expenditure without change in tax revenue.
Choose the correct answer from the options given below : Match List-I with List-II:
List-I (Concepts) List-II (Given by) A. Paradox of thrift I. K. Boulding B. Water-Diamond paradox II. A.C. Pigou C. Wage employment paradox III. J.M. Keynes D. Macroeconomic paradox IV. Adam Smith
Choose the correct answer from the options given below:- Which of the followings are the effects of increase in government spending in IS-LM framework in a closed economy?
A. Increase in income by multiplier times government expenditure.
B. Shift in IS curve to the right leading to disequilibrium in money market at given level of interest rate.
C. Quantity of money demand will be higher.
D. Interest rate will decrease.
Ε. Private investment will increase leading to increase in aggregate demand.
Choose the correct answer from the options given below : - If the marginal propensity to consume is 0.8 and initial increase in tax revenues by the government is Rs. 100, then the impact on national income would be:
- Which of the followings are true about New Classical approach.
A. The main protagonist was R.E. Lucas Jr.
B. It is based on adaptive expectation.
C. It was developed during 1950s.
D. Complete wage and price flexibility.
Ε. Difference between actual and expected price is a random error.
Choose the most appropriate answer from the options given below :
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