Question

"Variable inflation hurts both debtors and creditors because:

a. inflation makes the money-fixed assets of creditors worth less.
b. inflation makes the money-fixed liabilities of debtors worth less.
c. most debtors and creditors are risk averse.
d. most debtors and creditors are risk neutral"

Answer 1

C). Most debtors and creditors are risk averse.

Step-by-step explanation:

Inflation is described as the condition in the economy in which prices of goods and services tend to increase which reduces the purchasing power of the people.

As per the question, the variable inflation affects both the debtors as well as creditors as 'most of them(debtors and creditors) are risk-averse.' However, the debtors can gain by repaying a similar amount but with a less purchasing power during such time but they fear to take such risks due to the constant variance while the creditors also possess the similar risk aversiveness due to fluctuations in the increase of prices. Therefore, option C is the correct answer.