[Solved] 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?

Q72. 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: 1

Statement 1 (Correct): Recent central bank actions reflect this principle. With post-pandemic recoveries, many have raised interest rates to combat inflation.

Statement 2 (Correct): This statement explains the rationale behind statement 1. Central banks believe raising interest rates can influence borrowing, spending, and economic activity, ultimately impacting inflation.

How Interest Rate Hikes Work:

Reduced Borrowing and Spending: Higher interest rates make borrowing more expensive, discouraging businesses and consumers from taking out loans. This, in turn, reduces overall spending in the economy.

Cooling Down the Economy: By limiting borrowing and spending, interest rate hikes aim to prevent an economy from overheating and experiencing excessive inflation.