UPSC Prelims 2024 CSAT Paper II · Q3 of 79 Comprehension medium

Passage

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.

  1. (a) 1 only
  2. (b) 2 only
  3. (c) Both 1 and 2 ✓ UPSC's answer
  4. (d) Neither 1 nor 2

Why the answer is (c)

• The passage states that without fiscal backup, monetary policy eventually loses traction, implying that central banks cannot effectively bring down inflation without budgetary support, which validates statement 1.

• It explains that higher interest rates become inflationary if governments borrow more to cover debt-service costs, showing that the outcome of monetary policy is contingent on the government's fiscal actions, which validates statement 2.

• Since the text explicitly links the success of monetary policy to fiscal discipline and notes that monetary policy loses traction without fiscal backup, both inferences are logically supported.

• Therefore, both statement 1 and statement 2 are correct inferences from the passage.

Why the other options are wrong

(a) 1 only
Statement 2 is also a valid inference because the passage explicitly states that the effects of monetary policy depend on whether the government cuts spending or raises taxes.
(b) 2 only
Statement 1 is also a valid inference because the passage asserts that without fiscal backup, monetary policy loses traction, meaning central banks cannot succeed alone.
(d) Neither 1 nor 2
Both statements are supported by the text, so claiming neither is correct is factually incorrect based on the passage's logic.

Asked in the CSAT Paper II of the UPSC Civil Services Preliminary Examination 2024, held on 16 June 2024. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.

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