Effects of Inflation

Inflation benefits debtors because they repay their debts with money that is worth less than when they borrowed it. For example, if someone borrows ₹100 at 5% interest during 10% inflation, they effectively pay back less in real terms (Statement 1 is correct). Conversely, inflation harms bond-holders because the real value of the fixed interest they receive decreases with inflation. If a bond yields 5% but inflation is 10%, the real return is negative (Statement 2 is incorrect). Therefore, only Statement 1 is correct. > KEY POINT: Inflation = Debtors benefit (repay with cheaper money), Bond-holders suffer (fixed income erodes). Answer: (a).