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.

Which of the following statements best reflects/reflect the most logical and rational inference/inferences that can be made from the passage?
1. Central banks cannot bring down inflation without budgetary backing.
2. The effects of monetary policy depend on the fiscal policies pursued by the government.

Select the correct answer using the code given below.

Question

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.

Which of the following statements best reflects/reflect the most logical and rational inference/inferences that can be made from the passage?
1. Central banks cannot bring down inflation without budgetary backing.
2. The effects of monetary policy depend on the fiscal policies pursued by the government.

Select the correct answer using the code given below.

Accepted Answer

Both 1 and 2. Both inferences flow directly from the passage. The passage states 'Without the fiscal backup, monetary policy eventually loses traction', which directly supports inference 1 — central banks (monetary policy) cannot tame inflation without supporting fiscal action. The passage also explains that higher interest rates can become inflationary if governments borrow more to service debt, showing that monetary policy outcomes depend on government fiscal behaviour — supporting inference 2. Hence both 1 and 2 are valid inferences.

Explanation

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