Post-pandemic central bank interest rate hikes; central banks' ability to counteract inflation via monetary policy
Question
Consider the following statements: Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes. Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means. Which one of the following is correct in respect of the above statements?
Options
Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
Statement-I is correct but Statement-II is incorrect
Statement-I is incorrect but Statement-II is correct
Explanation
Both statements are correct, and Statement-II explains Statement-I. Post-pandemic supply shocks and stimulus packages caused global inflation. Consequently, Central Banks (like the US Federal Reserve and RBI) executed aggressive interest rate hikes (Statement-I). They did this precisely because the foundational premise of monetary policy is that raising borrowing costs will cool down demand and counteract rising consumer prices (Statement-II).
Answer: (a).
Question details
Year
2023
Paper
GS Paper 1
Question
Q22
Subject
Economy
Sub-topic
Banking & RBI
Type
Assertion-Reason
Difficulty
Medium
Nature
Current-affairs-linked
Source hint
Global Post-Pandemic Inflation & Fed Monetary Tightening 2022
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