Consider the following statements : 1. Inflation benefits the debtors. 2. Inflation benefits the bond-holders. Which of the statements given above is/are correct?

1. Statement 1 is correct. Inflation is a general increase in prices and fall in the purchasing value of money. Debtors are individuals or entities who owe money. When inflation occurs, the real value of the money they need to repay decreases. They borrowed money with higher purchasing power and repay with money that has lower purchasing power. Therefore, unanticipated inflation generally benefits the debtors by reducing the real burden of their debt. 2. Statement 2 is incorrect. Bond-holders are creditors; they have lent money to the issuer of the bond and typically receive fixed interest payments and the principal amount upon maturity. Inflation erodes the purchasing power of these fixed future cash flows. The interest payments and the principal amount, when repaid, will buy fewer goods and services than anticipated when the bond was purchased. Therefore, unanticipated inflation harms bond-holders (creditors).