UPSC Previous Year Question | Prelims GS | 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?

  1. Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
  2. Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
  3. Statement-I is correct but Statement-II is incorrect
  4. Statement-I is incorrect but Statement-II is correct

Answer

Correct Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

Explanation

Post-pandemic, Central Banks worldwide raised interest rates (Statement-I) precisely because they believe monetary policy tools like rate hikes can counteract rising consumer prices/inflation (Statement-II), making II the explanation for I.

Topics: economy, inflation targeting, interest rates, monetary policy