When a transformer is loaded, the secondary terminal voltage drops. That means power factor is

Answer: (D) lagging.

Explanation:

Approximate relation of no load and full load voltages in a transformer is,

Where E2, V2, R, X and cosθ  are no load voltage, full load voltage, secondary resistance of transformer, secondary leakage reactance of transformer and power factor respectively. If power factor is lagging, θ  is positive which means ( Rcosθ  + Xsinθ ) > 0. Thus E2 > V2.