Comprehension : Comprehension

Q 60 / 466

UPSC CSE Prelims 2024

As inflation rises, even governments previously committed to budget discipline are spending freely to help households. Higher interest rates announced by central banks are supposed to help produce modest fiscal austerity, because to maintain stable debts while paying more to borrow, governments must cut spending or raise taxes. Without the fiscal backup, monetary policy eventually loses traction. Higher interest rates become inflationary, not disinflationary, because they simply lead governments to borrow more to pay rising debt-service costs. The risk of monetary unmooring is greater when public debt rises, because interest rates become more important to budget deficits.

Which of the following statements best reflects/reflect the most logical and rational inference/inferences that can be made from the passage?

  1. Central banks cannot bring down inflation without budgetary backing.
  2. The effects of monetary policy depend on the fiscal policies pursued by the government.

EXPLANATION

Correct Option (3)

Both statements 1 and 2 are logical and rational inferences that can be made from the passage.

  • Statement 1: The passage explicitly states that "Without the fiscal backup, monetary policy eventually loses traction." This directly implies that central banks, which implement monetary policy, cannot effectively curb inflation without the complementary support of government budgetary measures, such as spending cuts or tax increases.
  • Statement 2: The passage explains that "Higher interest rates become inflationary, not disinflationary, because they simply lead governments to borrow more to pay rising debt-service costs" if fiscal discipline is absent. This illustrates that the intended effects of monetary policy are contingent upon the fiscal policies pursued by the government; otherwise, monetary tightening can exacerbate inflationary pressures.

Incorrect Options:

  • Option 1 (1 only): This option is incorrect because while statement 1 is a valid inference, statement 2 is also clearly and logically supported by the passage.
  • Option 2 (2 only): This option is incorrect because while statement 2 is a valid inference, statement 1 is also clearly and logically supported by the passage.
  • Option 4 (Neither 1 nor 2): This option is incorrect as both statements 1 and 2 are direct and logical inferences derived from the information presented in the passage.