ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -It is caused when increase in money supply and production falls. Inflation brings most benefits to debtors because people seek more money from debtors in order to meet the increased prices of commodities and hence creditors are at loss.

Detailed explanation-2: -The negative effect of rising inflation on the profitability and financial stability of your customers’ businesses can be significant. And that can have a knock-on effect on you as a creditor because there’s an increased risk of those customers struggling to pay their debts.

Detailed explanation-3: -Inflation redistributes wealth from creditors to debtors i.e. lenders suffer and borrowers benefit out of inflation. Bondholders have lent money (to debtor) and received a bond in return. So he is a lender, he suffers (Debtor benefits from inflation).

Detailed explanation-4: -As the rate of inflation increases, the value of the debt owed to the debt collectors tends to reduce. Since the value of the money has reduced in a year, so will the ‘buying power’ of the money. While this is theoretically true, inflation also increases interest rates.

Detailed explanation-5: -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.