Prelims 2023

Q62. 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?
a. Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
b. Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
c. Statement-I is correct but Statement II is incorrect
d. Statement-I is incorrect but Statement –II ic correct

Question from UPSC Prelims 2023 GS Paper

Explanation : 

Correct Answer: a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.

Central Banks’ Post-Pandemic Strategy: Interest Rate Hikes as a Tool to Tackle Inflation

In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes to counteract the rising consumer prices and inflation. This is because Central Banks generally assume that they have the ability to control inflation and stabilize the economy through monetary policy means, such as adjusting interest rates.

When consumer prices are rising, Central Banks often increase interest rates to slow down inflation. Higher interest rates make borrowing more expensive, which in turn reduces consumer spending and business investment. This helps to cool down the economy and bring inflation back under control.

So, in this case, Statement-II is the correct explanation for Statement-I, as Central Banks’ belief in their ability to counteract rising consumer prices through monetary policy means is the reason behind their decision to carry out interest rate hikes in the post-pandemic period.

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