UPSC Prelims 2013 Q66: Indian Economy – Inflation & Price Indices
Consider the following statements :
1. Inflation benefits the debtors.
2. 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
Answer: (a) 1 only
Explanation
Who gains from inflation?
Inflation lowers the real value of money.
| Statement | Verdict | Reason |
|---|---|---|
| 1. Inflation benefits the debtors | Correct | They repay in money that is worth less than when they borrowed |
| 2. Inflation benefits the bond-holders | Incorrect | Bonds pay a fixed sum; its real value falls |
Winners and losers:
| Gain from inflation | Lose from inflation |
|---|---|
| Debtors (borrowers) | Creditors (lenders) |
| Holders of real assets: land, gold | Bond-holders and savers in fixed deposits |
| Businesses with stocks of goods | Pensioners and fixed-salary earners |
| The Government, as a big borrower | The poor, whose wages lag behind prices |
Related terms: deflation (falling prices), stagflation (inflation with stagnation).
Answer: (a) 1 only.
Why each option is right or wrong
- (a) CORRECT. Inflation benefits debtors, who repay in cheaper money.
- (b) Incorrect. Bond-holders lose, because their fixed return buys less.
- (c) Incorrect. Statement 2 is false.
- (d) Incorrect. Statement 1 is true.
Key point
Inflation helps debtors and holders of real assets; hurts creditors, bond-holders, pensioners and fixed-income earners.
Remember
Inflation helps borrowers, hurts lenders.
Common mistakes
- Thinking bond-holders gain because interest is paid.
- Forgetting that a bond-holder is a lender.
- Mixing up debtor (borrower) and creditor (lender).
Exam tip
Inflation is good for those who owe, bad for those who are owed.
Sources
- NCERT Class XII — Introductory Macroeconomics (Money and Banking; inflation)
- Reserve Bank of India — Frequently Asked Questions on inflation