3.
Passage-2
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 :