Q. Consider the following statements:
1.Inflation redistributes wealth from creditors to debtors.
2.Rising inflation indicates lowering aggregate demand.
Which of the statements given above is/are correct?

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: A

Explanation: 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. The opposite effect takes place when inflation falls (i.e., deflation).
  • Rising inflation indicates rising aggregate demand and indicates comparatively lower supply and higher purchasing capacity among the consumers.
  • Usually, higher inflation suggests the producers to increase their production level as it is generally considered as an indication of higher demand in the economy.

Source: Ramesh Singh