Inflation

Choose the Correct Answer

Correct Answer : Option a

Explanation
Statement 1 is correct : When inflation rises, the real value of money decreases. For borrowers, this means that the amount they owe (in real terms) becomes less valuable over time. In other words, they repay their loans with money that is worth less than when they initially borrowed it, which benefits them.

Statement 2 is not correct : Fixed-income securities, such as bonds, pay a fixed interest rate. When inflation rises, the real value of the interest payments decreases, leading to a lower real return for investors. Therefore, inflation generally harms investors holding fixed-income securities unless the interest rates on those securities are adjusted for inflation (e.g., through inflation-linked bonds).