Tight monetary policy is an action taken by a central bank, such as the Federal Reserve, to curb overheated economic growth. Central banks employ tight monetary policy when an economy is experiencing rapid acceleration or when inflation, which pertains to overall prices, is escalating too swiftly.
Statement 1 is correct. Central banks implement monetary policies to maintain stability and positive trends in inflation, unemployment, and economic growth. In instances of economic overheating, central banks raise interest rates and implement other contractionary measures to decelerate the pace. This can discourage investments and lower asset prices. Consequently, the tight monetary policy of the US Federal Reserve might induce capital flight among investors.
Statement 2 is correct. Capital flight can elevate interest costs due to the reduction in the money supply within the system. As a result, this would contribute to an increase in the interest expenses for firms that have engaged in external commercial borrowings.
Statement 3 is incorrect. The devaluation of the domestic currency does not impact External Commercial Borrowings since they are denominated in foreign currency, rather than the domestic currency.
NOTE: The given question was dropped by UPSC from the Official Answer Key.
