Effects of Inflation on Economic Agents

Inflation benefits debtors because they repay loans with money that is worth less than when they borrowed it, effectively reducing their real debt burden (statement 1 is correct). Inflation harms bond-holders because they receive fixed nominal interest payments that become less valuable in real terms as inflation erodes purchasing power (statement 2 is incorrect). During inflation, bond returns in real terms decline, making bonds less attractive and benefiting those who hold debt rather than creditors. > Inflation: Benefits DEBTORS (repay less real value), HARMS bondholders (fixed income eroded). Answer: (a).