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. Based on the above passage, the following assumptions have been made: 1. Fiscal policies of governments are solely responsible for higher prices. 2. Higher prices do not affect the long-term government bonds. Which of the assumptions given above is/are valid?

The passage does not support either of the assumptions.

1. Fiscal policies of governments are solely responsible for higher prices. The passage states, "As inflation rises, even governments... are spending freely." This implies inflation is already a factor, and then government spending occurs. It also mentions central bank actions. The passage describes how government spending can contribute to or exacerbate inflation, especially when interest rates rise, but it does not claim that fiscal policies are solely responsible for higher prices. The word "solely" makes this assumption invalid.

2. Higher prices do not affect the long-term government bonds. The passage discusses "higher interest rates" and "rising debt-service costs" for governments, indicating that the cost of borrowing (which is reflected in bond yields) is affected. While it doesn't explicitly detail the impact on long-term government bonds, the general economic principle is that higher inflation and rising interest rates negatively affect bond prices (and increase their yields) to compensate investors for the loss of purchasing power. The passage provides no basis to assume that higher prices do not affect these bonds; in fact, the context of rising interest rates and debt costs suggests they would be affected.

Therefore, neither assumption is valid based on the provided text.