Consider the following statements:

1. Inflation benefits the debtors.
2. Inflation benefits the bondholders.

Which of the statements given above is/are correct?

[UPSC Civil Services Exam – 2013 Prelims]

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer: (a)        

Explanation:

• Inflation redistributes wealth from creditors to debtors i.e.lenders suffer and borrowers benefit out of inflation.
  • Bondholders have lent money (to debtor) and received a bond in return.
  • So he is a lender, he suffers (Debtor benefits from inflation).
  • Hence statement 1 is correct.
• Statement 2 has not used specifically the word “inflation-indexed bonds”, hence we cannot say Inflation benefits the bond-holders.
  • ​Hence statement 2 is incorrect.