Q:
Which of the following will be the outcome if an economy is under the inflationary pressure?
1.Domestic currency heads for depreciation.
2.Exports become less competitive with imports getting costlier.
3.Cost of borrowing decreases.4.Bondholders get benefitted.
Select the correct answer using the code given below.
Answer & Explanation
Answer: C) 1 and 3 only
Explanation: Creditors and debtors:
During inflation creditors lose because they receive in effect less in goods and services than if they had received the repayments during a period of low prices. Debtors, on other hand, as a group gain during inflation, since they repay their debts in currency that has lost its value.The aggregate volume of internal trade tends to increase during inflation due to higher incomes, greater production and larger spending. But the export trade is likely to suffer on account of arise in the prices of domestic goods.
The same currency unit will now buy less goods and services.But the bondholders lose as they get a fixed interest the real value of which has already fallen.
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