Q. With reference to the “effects of inflation”, which of the following statements is/are correct?
1. Borrowers suffer and lenders benefit out of inflation.
2. Rising inflation indicates rising aggregate demand.
Select the correct answer using the codes given below:

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: B

There are multi-dimensional effects of inflation on an economy both at the micro and macro levels.  

  • It redistributes income, distorts relative prices, destabilizes employment, tax, saving and investment policies, and finally it may bring in recession and depression in an economy. 
  • Inflation redistributes wealth from creditors to debtors, i.e., lenders suffer and borrowers benefit out of inflation. 
  • Rising inflation indicates rising aggregate demand and indicates comparatively lower supply and higher purchasing capacity among the consumers. 

Source: TMH Ramesh Singh