UPSC CSE Prelims
Question 3
Consider the following statements:
- Inflation benefits the debtors.
- Inflation benefits the bondholders.
Which of the statements given above is/are correct?
View correct answer and explanation
Correct answer: A
Correct Option: A
Explanation: Unexpected inflation lowers the real burden of fixed nominal debt, generally helping borrowers and harming holders of fixed-interest bonds.
Statement/Pair-wise Analysis:
Statement/Item 1: Correct - Debtors repay nominal obligations with money of reduced purchasing power.
Statement/Item 2: Incorrect - Fixed-coupon bondholders lose purchasing power because inflation erodes their real return.
Option-wise Analysis:
A: Correct - selects all and only the accurate statements/pairs.
B: Incorrect - includes false item 2 and excludes true item 1.
C: Incorrect - includes false item 2.
D: Incorrect - excludes true item 1.