Inflation brings most benefits to which one of the following?
B Creditors C Saving bank account holder
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Solution
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In economics, inflation is a sustained increasein the general price level of goods and services in an economy overa period of time. It is caused when increase in money supply and productionfalls. Inflation brings most benefits to debtors because people seek more moneyfrom debtors in order to meet the increased prices of commodities.
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Now, let's delve into the concepts embedded in the provided article:
Inflation:
Definition: Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.
Causes: Inflation is typically caused by an increase in the money supply and a fall in production.
Effects: It results in a decrease in the purchasing power of a currency, leading to higher prices for goods and services.
Debtors:
Definition: Debtors are individuals or entities that owe money.
Role in Inflation: In the context of inflation, debtors benefit. This is because, during inflation, the amount of money borrowed remains fixed (as per the terms of the loan agreement), but the value of that money decreases due to rising prices. Debtors can repay their loans with money that has less purchasing power, effectively paying back less in real terms.
Economic Agents:
Government Pensioner (A): Individuals who receive a pension from the government after retirement.
Creditors (B): Individuals or institutions that have lent money to others.
Saving Bank Account Holder (C): Individuals who have savings in a bank account.
Debtors (D): Individuals or entities that owe money to others.
Benefits of Inflation to Different Economic Agents:
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Debtors (D): As mentioned in the article, debtors benefit the most during inflation. The decrease in the real value of money allows them to repay loans with money that has a lower purchasing power.
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Government Pensioner (A): Pensioners may not directly benefit from inflation, as their fixed pensions may lose purchasing power. However, this depends on the extent to which pension payments are adjusted for inflation.
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Creditors (B): Creditors may suffer during inflation, as the money they receive in repayment has less purchasing power than when they lent it.
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Saving Bank Account Holder (C): Inflation is generally detrimental to savers, as the real value of their savings erodes over time. However, this can vary based on the interest rates offered on savings accounts.
In conclusion, the article correctly points out that inflation brings the most benefits to debtors, as they can repay their loans with money that is worth less in real terms.
