ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -During inflation, the purchasing power of money decreases. Therefore, if the borrower is paying a rate of interest which is less than the inflation rate, then he gains in the process.

Detailed explanation-2: -Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

Detailed explanation-3: -In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

Detailed explanation-4: -However, while higher inflation does erode the real value of nominal assets, such as demand deposits, it also lowers the real value of nominal liabilities, such as mortgages. So, borrowers directly benefit from unexpected inflation because they can pay back their loans in depreciated money.

Detailed explanation-5: -Renters. Savers. Retirees and People Earning Fixed-Incomes. First-Time Homebuyers. Long-Term Bonds. Credit Card Borrowers. General Economic Confidence. 01-Mar-2023