Consider the following statements:
- 1.Inflation benefits the debtors.
- 2.Inflation benefits the bond-holders.
Which of the statements given above is/are correct?
Answer & explanation
Answer: (a) 1 only
Only statement 1 is correct. Inflation cuts the real value of money. A debtor repays a fixed money amount in rupees that buy less, so the debtor gains. A bond-holder receives fixed interest and principal whose purchasing power has fallen, so the bond-holder loses.
- ✓ 1. A loan is repaid in fixed nominal terms. Unanticipated inflation reduces the real value of the debt, so net debtors gain and net creditors lose.
- ✗ 2. A conventional bond pays fixed nominal interest and a fixed principal. Inflation erodes their real value, so bond-holders' wealth is diminished. The longer the bond's life, the more its fixed payments are exposed to rising prices.
Remember · Inflation helps debtors and borrowers, because they repay in cheaper money. It hurts creditors, bond-holders and holders of fixed-income assets, whose receipts buy less.
Sources
- World Bank, Inflation in Emerging and Developing Economies, Chapter 1 ↗ “Because the wealthy tend to be net creditors, such an episode of unanticipated inflation could lead to a reduction in their wealth and a corresponding increase in the wealth of net debtors, by reducing the real value of their debt”
- World Bank policy research document on inflation and index-linked bonds ↗ “The Pigou effect tells us that government bondholders whose wealth is diminished by inflation will spend less.”
Question: UPSC Civil Services (Preliminary) 2013, General Studies Paper I. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). ·
