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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 in a flexible currency regime.
How many of the above statements is/are correct?
- a)Only one
- b)Only two
- c)All three
- d)None
Correct answer is option 'A'. Can you explain this answer?
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Which of the following is/are the Effects of Inflation? Usually lender...
Effects of Inflation
Inflation is the sustained increase in the general price level of goods and services over a period of time. It has several effects on the economy, and the given options discuss three possible effects of inflation. Let's evaluate each statement individually:
1. Usually lenders suffer and borrowers benefit out of inflation.
This statement is correct. Inflation erodes the purchasing power of money over time. When lenders lend money, they expect to be repaid with interest. However, if inflation occurs, the value of the money repaid will be lower than the value of the money borrowed. As a result, lenders suffer a loss in real terms. On the other hand, borrowers benefit from inflation as they are repaying their loans with money that has a lower purchasing power.
2. Holding money remains an intelligent economic decision during inflation.
This statement is incorrect. Inflation reduces the value of money, so holding money during inflation is not a wise economic decision. Instead, individuals and businesses tend to invest their money in assets that can retain or increase in value over time, such as real estate, stocks, or commodities. By doing so, they can protect their wealth from the erosion caused by inflation.
3. With every inflation, the currency of the country appreciates in a flexible currency regime.
This statement is incorrect. In a flexible currency regime, where the exchange rate is determined by market forces, inflation typically leads to a depreciation of the currency rather than appreciation. When a country experiences inflation, its goods and services become relatively more expensive compared to other countries, leading to a decrease in demand for its currency. As a result, the value of the currency depreciates in the foreign exchange market.
Therefore, out of the three given statements, only the first statement is correct. Lenders tend to suffer while borrowers benefit from inflation. The second statement is incorrect as holding money during inflation is not a wise decision. The third statement is also incorrect as inflation typically leads to a depreciation of the currency in a flexible currency regime.
Inflation is the sustained increase in the general price level of goods and services over a period of time. It has several effects on the economy, and the given options discuss three possible effects of inflation. Let's evaluate each statement individually:
1. Usually lenders suffer and borrowers benefit out of inflation.
This statement is correct. Inflation erodes the purchasing power of money over time. When lenders lend money, they expect to be repaid with interest. However, if inflation occurs, the value of the money repaid will be lower than the value of the money borrowed. As a result, lenders suffer a loss in real terms. On the other hand, borrowers benefit from inflation as they are repaying their loans with money that has a lower purchasing power.
2. Holding money remains an intelligent economic decision during inflation.
This statement is incorrect. Inflation reduces the value of money, so holding money during inflation is not a wise economic decision. Instead, individuals and businesses tend to invest their money in assets that can retain or increase in value over time, such as real estate, stocks, or commodities. By doing so, they can protect their wealth from the erosion caused by inflation.
3. With every inflation, the currency of the country appreciates in a flexible currency regime.
This statement is incorrect. In a flexible currency regime, where the exchange rate is determined by market forces, inflation typically leads to a depreciation of the currency rather than appreciation. When a country experiences inflation, its goods and services become relatively more expensive compared to other countries, leading to a decrease in demand for its currency. As a result, the value of the currency depreciates in the foreign exchange market.
Therefore, out of the three given statements, only the first statement is correct. Lenders tend to suffer while borrowers benefit from inflation. The second statement is incorrect as holding money during inflation is not a wise decision. The third statement is also incorrect as inflation typically leads to a depreciation of the currency in a flexible currency regime.
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Which of the following is/are the Effects of Inflation? Usually lender...
Only statement 1 is correct.
- 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).
- 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.
- Holding money does not remain an intelligent economic decision (because money loses value with every increase in inflation).
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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 in a flexible currency regime.How many of the above statements is/are correct?a)Only oneb)Only twoc)All threed)NoneCorrect answer is option 'A'. Can you explain this answer?
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