UPSC Prelims 2024·CSAT·Reading Comprehension·Passage Comprehension

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 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. Select the correct answer using the code given below:

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  1. A1 only
  2. B2 only
  3. CBoth 1 and 2Correct
  4. DNeither 1 nor 2

Explanation

The passage explicitly states, "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." Statement 1: "Central banks cannot bring down inflation without budgetary backing." This is directly supported by the passage. If monetary policy loses traction and even becomes inflationary without fiscal backup, it implies that central banks cannot effectively bring down inflation without that support. Statement 2: "The effects of monetary policy depend on the fiscal policies pursued by the government." This is also clearly stated. The passage explains that the intended disinflationary effect of higher interest rates (monetary policy) is negated if governments do not pursue appropriate fiscal policies (like cutting spending or raising taxes, i.e., fiscal backup). The outcome of monetary policy (disinflationary or inflationary) is shown to be contingent on fiscal policy. Both statements are logical and rational inferences directly derivable from the text. Therefore, C is the correct answer.
Reading Comprehension: As inflation rises, even governments previously committed to budget discipline are spending freely to help households. H
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