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?
Answer:
(a)
The answer is (a), both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I. Statement-I is correct because many central banks around the world have raised interest rates in the post-pandemic period in an effort to combat rising inflation. For example, the US Federal Reserve has raised interest rates four times since March 2022, and the Bank of England has raised interest rates five times since December 2021. Statement-II is also correct because central banks believe that they can use monetary policy to influence the level of inflation. When interest rates are raised, it becomes more expensive to borrow money, This, in turn, can help to bring down inflation. Therefore, Statement-II is the correct explanation for Statement-I. By raising interest rates, central banks are hoping to slow down the economy and bring inflation under control.