Q. Which of the following are consequences of inflation on creditors and lending institutions?
1.Creditors suffer losses as loans are repaid in depreciated currency.
2.Inflation introduces the need to factor in Time Value of Money (TVM) while determining interest rates.
3.Inflation leads to reduction in nominal interest rates to ease credit flow in the economy.

[A] 1 and 2 only

[B] 2 and 3 only

[C] 1 and 3 only

[D] 1, 2 and 3

Answer: A
Notes:

Explanation:

  • Creditors (lenders) lose during inflation because repayments are made in money of lower purchasing power.
  • Inflation impacts lending through Time Value of Money (TVM), which influences interest rates.
  • Nominal interest rates often rise during inflation to compensate for inflation risk, not fall.
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