Read the following passage and answer the item that follows. Your answer to this item should be based on the passage only.
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.
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
Explanation
Assumption 1 is invalid because the passage never says fiscal policies are 'solely' responsible for inflation — it discusses the interaction of monetary and fiscal policy, and mentions multiple drivers like debt-service costs and central bank rate decisions. The word 'solely' makes 1 too strong. Assumption 2 is also invalid — the passage clearly links higher interest rates, public debt and budget deficits, implying higher prices do affect long-term government bonds (through debt-service costs and yields). Hence neither assumption is valid.
💡 Practice unlimited UPSC CSE PYQs + AI-tracked progress on each topic. Sign up free →