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Which of the following is/are the Effects of Inflation?
- Usually lenders suffer and borrowers benefit out of inflation.
- Holding money remains an intelligent economic decision during inflation.
- With every inflation the currency of the country appreciates.
Select the correct answer code:
- a)1 only
- b)1, 2
- c)1, 3
- d)2, 3
Correct answer is option 'A'. Can you explain this answer?
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Most Upvoted Answer
Which of the following is/are the Effects of Inflation? Usually lender...
Effects of Inflation:
1. Lenders suffer and borrowers benefit out of inflation:
During inflation, the prices of goods and services increase, which means that the value of money decreases. As a result, the lenders who have lent money at a fixed interest rate suffer as the value of the money they receive back decreases. On the other hand, the borrowers benefit as they can repay their loans with money that has less value than when they had borrowed it.
2. Holding money remains an intelligent economic decision during inflation:
During inflation, holding money becomes less valuable as the value of money decreases. Therefore, people tend to invest their money in assets like real estate, gold, or stocks, which have a higher value than money. However, holding money is still an intelligent economic decision as it provides liquidity and offers a hedge against unforeseen events.
3. With every inflation, the currency of the country appreciates:
This statement is incorrect. Inflation causes the value of currency to decrease. As the general price level of goods and services increases, the purchasing power of money decreases, leading to a decline in the value of currency. Therefore, with inflation, the currency of the country depreciates rather than appreciates.
Therefore, option A, which states that only the first effect is correct, is the correct answer.
1. Lenders suffer and borrowers benefit out of inflation:
During inflation, the prices of goods and services increase, which means that the value of money decreases. As a result, the lenders who have lent money at a fixed interest rate suffer as the value of the money they receive back decreases. On the other hand, the borrowers benefit as they can repay their loans with money that has less value than when they had borrowed it.
2. Holding money remains an intelligent economic decision during inflation:
During inflation, holding money becomes less valuable as the value of money decreases. Therefore, people tend to invest their money in assets like real estate, gold, or stocks, which have a higher value than money. However, holding money is still an intelligent economic decision as it provides liquidity and offers a hedge against unforeseen events.
3. With every inflation, the currency of the country appreciates:
This statement is incorrect. Inflation causes the value of currency to decrease. As the general price level of goods and services increases, the purchasing power of money decreases, leading to a decline in the value of currency. Therefore, with inflation, the currency of the country depreciates rather than appreciates.
Therefore, option A, which states that only the first effect is correct, is the correct answer.
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Community Answer
Which of the following is/are the Effects of Inflation? Usually lender...
- Inflation redistributes wealth from creditors to debtors, i.e., lenders suffer and borrowers benefit out of inflation. The opposite effect takes place when inflation falls (i.e., deflation).
- Holding money does not remain an intelligent economic decision (because money loses value with every increase in inflation).
- With every inflation the currency of the economy depreciates (loses its exchange value in front of a foreign currency) provided it follows the flexible currency regime.
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Which of the following is/are the Effects of Inflation? Usually lenders suffer and borrowers benefit out of inflation. Holding money remains an intelligent economic decision during inflation. With every inflation the currency of the country appreciates.Select the correct answer code:a)1 onlyb)1, 2c)1, 3d)2, 3Correct answer is option 'A'. Can you explain this answer?
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