Which group is most likely to benefit from inflation?
A Savers
B Fixed-income earners
C Creditors
D Debtors
The correct answer and explanation is:
Correct Answer: D) Debtors
Inflation refers to the general increase in prices of goods and services over time, which results in the decline of the purchasing power of money. Among the different groups in an economy, debtors are the most likely to benefit from inflation. This is because inflation reduces the real value of money, meaning the money that is repaid in the future is worth less than when it was borrowed.
Debtors borrow money with the intention of paying it back later, often in fixed amounts. When inflation rises, the value of the currency decreases. Therefore, the amount they repay loses purchasing power over time. For example, if someone borrows 1,000 units of currency and inflation increases by 10 percent, that 1,000 has less value in the future, so repaying it is effectively cheaper in real terms. This benefits the debtor, especially if their income increases with inflation while their debt repayments remain fixed.
In contrast, savers lose out during inflation because the money they save has less purchasing power in the future. Unless the interest they earn on savings keeps up with inflation, they will be able to buy less with their saved money. Fixed-income earners are also negatively affected since their income does not increase with inflation, resulting in reduced real income. Creditors, or lenders, lose because they are repaid with money that is worth less than when it was originally lent.
Thus, inflation tends to redistribute wealth from lenders to borrowers. Debtors benefit from paying back loans with cheaper currency, making them the group that gains the most in times of inflation.