QUESTION

GS

Easy

Economy

Prelims 2023

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?

Select an option to attempt

Explanation

  • Statement-I is correct: In the aftermath of the COVID-19 pandemic, global economies faced significant inflationary pressures due to supply chain disruptions and increased demand. To curb this inflation, many central banks, including the US Federal Reserve and the Reserve Bank of India, initiated a series of interest rate hikes to reduce liquidity in the market.
  • Statement-II is correct: A core principle of modern central banking is the belief that monetary policy tools—specifically adjusting interest rates—can influence economic activity and price levels. By raising rates, central banks aim to reduce spending and investment, thereby cooling down rising consumer prices.
  • Relationship: Statement-II explains the underlying logic behind the actions mentioned in Statement-I. Central banks carried out interest rate hikes because they operate under the assumption that such monetary policy measures are effective tools to counteract inflation. Thus, Statement-II is the correct explanation for Statement-I.

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