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.

Q1. 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:
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Correct answer: c) Both 1 and 2

Q2. 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?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Correct answer: d) Neither 1 nor 2

Question from UPSC Prelims 2024 CSAT

Explanation :

Q1. Let’s examine the given statements:

1. “Central banks cannot bring down inflation without budgetary backing”
– The passage states that “Without the fiscal backup, monetary policy eventually loses traction”
– It also mentions that higher interest rates can become inflationary instead of disinflationary without fiscal support
– This statement is supported by the passage

2. “The effects of monetary policy depend on the fiscal policies pursued by the government”
– The passage shows that government spending decisions affect how monetary policy works
– When governments continue to spend freely despite higher interest rates, it undermines the intended disinflationary effect
– Fiscal policy choices clearly influence monetary policy effectiveness
– This statement is also supported by the passage

Answer: (c) Both 1 and 2
Both statements are logical inferences that can be made from the passage.

Q2. Let’s examine the assumptions:

1. “Fiscal policies of governments are solely responsible for higher prices”
– The passage discusses both monetary and fiscal factors affecting inflation
– It doesn’t suggest that fiscal policy is the sole cause of higher prices
– This is not a valid assumption

2. “Higher prices do not affect the long-term government bonds”
– The passage doesn’t discuss this relationship at all
– No information is provided about the effect of prices on government bonds
– This is not a valid assumption

Answer: (d) Neither 1 nor 2
Neither assumption can be validated based on the information provided in the passage.