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.

Based on the above passage, the following assumptions have been made:
1. Fiscal policies of governments are solely responsible for higher prices.
2. Higher prices do not affect the long-term government bonds.

Which of the assumptions given above is/are valid?

Question

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.

Based on the above passage, the following assumptions have been made:
1. Fiscal policies of governments are solely responsible for higher prices.
2. Higher prices do not affect the long-term government bonds.

Which of the assumptions given above is/are valid?

Accepted Answer

Correct Option: (d) Neither 1 nor 2 Assumption 1 states that the fiscal policies of governments are solely responsible for higher prices. This is incorrect and invalid because 'solely' is an extreme limiter. Inflation is a complex macroeconomic phenomenon influenced by various demand-supply dynamics, and the passage does not claim that government fiscal policies are the single, exclusive cause of higher prices. Assumption 2 states that higher prices do not affect long-term government bonds. This is completely out of the scope of the passage, as there is absolutely no discussion or implication regarding long-term government bonds or their relationship with inflation. Since neither assumption is valid, the correct option is (d).

Based on the above passage, the following assumptions have been made:1. Fiscal policies of governments are solely responsible for higher prices.2. Higher prices do not affect the long-term government bonds.Which of the assumptions given above is/are valid?

हिंदी में प्रश्न एवं आदर्श उत्तर

Based on the above passage, the following assumptions have been made:
1. Fiscal policies of governments are solely responsible for higher prices.
2. Higher prices do not affect the long-term government bonds.

Which of the assumptions given above is/are valid?