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Consider the following statements:

1. Inflation benefits the debtors.
2. Inflation benefits the bond-holders.

Which of the statements given above is/are correct and why?



The correct statement is 1. Inflation benefits the debtors becoz inflation causes the purchasing power of money to decline, hence in real terms value of debt declines.

For ex: let a farmer borrows $10 to buy seeds of a plant hoping to make $20 out of that crop. Inflation kicks in and the farmer sells & harvests the crop for $50(instead of the expected $20). then instead of paying half of his income to pay the debt he only pays one-fifth of his income. So it is the debtor who eventually gets benefitted by inflation. 

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1. Inflation benefits the debtors.
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