Which of the following will be the outcome if an economy is under the inflationary pressure? 1. Domestic currency heads for depreciation. 2. Exports become less competitive with imports getting costlier. 3. Cost of borrowing decreases. 4. Bondholders get benefitted. Select the correct answer using the code given below.

Inflationary pressure leads to several macroeconomic outcomes. First, persistent high inflation causes a continuous weakening or depreciation of the domestic currency [4]. Second, inflation erodes external competitiveness because rising domestic prices make exports more expensive for foreign buyers, while imports may become relatively more attractive if domestic production costs rise faster than global prices [4]. Third, to combat inflation, central banks typically increase interest rates, which raises the cost of borrowing rather than decreasing it. Finally, inflation negatively impacts bondholders because the purchasing power of fixed interest payments declines, and rising interest rates cause the market price of existing bonds to drop [3]. Therefore, only statements 1 and 2 are correct outcomes of inflationary pressure, as borrowing costs rise and bondholders suffer losses.

Sources

1. [4] https://www.investopedia.com/articles/investing/100813/interesting-facts-about-imports-and-exports.asp
2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > There are mainly two causes of inflation: > p. 112
3. [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > The Committee (in its report in 2014) recommended for focusing on only one objective, i.e. INFLATION TARGETING. > p. 73