Explain the effect of inflation on fixed income groups and borrowers.

Asked by Topperlearning User | 11th May, 2015, 01:10: PM

Expert Answer:

The effect of inflation on fixed income groups and borrowers is as follows:

Fixed income groups: People who receive a fixed income are hit the hardest. People living on past savings, fixed interest or rent, pensions, salaries etc. suffer during periods of rising prices as their incomes remain fixed. The middle class who by hard work take care of their children's education, livelihood in the times of sickness and old age, and accommodate day-to-day expenses find it difficult to survive in the times of serious inflation.

Borrowers: Debtors borrow from creditors to repay the loan with interest at some future date. Changes in the price levels affect them differently at different time periods. During inflation, when the prices rise and the real value of money goes down, the debtors pay back less in real terms than what they had borrowed and thus to that extent they are gainers. On the other hand, the creditors get less in terms of goods and services than what they had lent and hence lose in that context.

Answered by  | 11th May, 2015, 03:10: PM

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