Which people are most likely to gain during inflation?
-
- Those living on pension
- Those living on their savings
- Those who are repaying borrowed money
- Those who have lent money
Correct Answer: Those who are repaying borrowed money
Answer Explanation
Answer (c) is correct. People who are repaying borrowed money are more likely to experience significant gains during inflation due to the erosion of money’s value.
Inflation is a persistent rise in the general price level of goods and services that affects a number of aspects of the economy. In periods of inflation, those who have borrowed money at a fixed interest rate are the most likely to be benefited. This mechanism is attributed to the decrease in money’s purchasing power as prices rise.
By using this dynamic, borrowers can effectively repay a smaller proportion of their original loan amount in real terms, resulting in a tangible financial gain.
Consider a scenario where an individual secures a loan to purchase a home. As inflation takes hold, the value of money gradually erodes over time. As the borrower makes mortgage payments, the mortgage is being repaid using money whose value has been reduced by rising living costs. Therefore, borrowers experience a reduction in their debt burden, resulting in a significant financial gain for them.
Why the other options are not correct
a. Those living on Pension:
If you are living on a pension, you may face considerable challenges during inflationary times. When prices rise, your fixed pension payment loses purchasing power. It can lead to a decline in their standard of living and hinder their ability to afford essential goods and services because of this reduction in purchasing power.
b. Those living on their saving:
The value of their savings diminishes as the purchasing power of money diminishes, resulting in substantial difficulties for those relying on savings to support their expenses during inflation. Due to the rise in prices, they may find that their savings are no longer sufficient to maintain their desired lifestyle.
d. Those who have lent money:
When lenders receive repaid, the money they receive has diminished purchasing power due to rising prices, so the lender will suffer losses during inflation. Lenders, those who have extended loans, are likely to suffer losses during inflation. As a result, lenders effectively receive back a lower real value than they initially lent, reducing their actual returns.
Conclusion
In conclusion, the impact of inflation on various segments of the population is far from uniform. Those who are repaying borrowed money are most likely to gain during inflationary periods. By gradually devaluing money, borrowers are able to reduce their real debt burden, resulting in a tangible gain in financial value.
However, individuals relying on pensions, saving money, or borrowing may face substantial challenges and losses. To be able to navigate the intricate effects of inflation on personal finances and make well-informed financial decisions, it is essential to understand these dynamics.
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
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