Q. Consider the following statements::
Statement – I:In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hike.
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?
Statement 1 is correct: In the post-pandemic recent past, many central banks worldwide have indeed carried out interest rate hikes. Central banks use interest rate adjustments as one of their monetary policy tools to manage the economy. When the economy is recovering and inflationary pressures increase, central banks may choose to increase interest rates to control inflation and ensure price stability. By raising interest rates, central banks aim to reduce borrowing and spending, which can help cool down an overheating economy and prevent excessive inflation.
Statement 2 is correct: Monetary policy refers to the actions taken by central banks to influence the supply of money and credit in the economy. Central banks believe that by adjusting interest rates, they can influence borrowing costs, spending patterns, and overall economic activity. When inflation rises, central banks may raise interest rates to make borrowing more expensive, thereby discouraging excessive spending and slowing down economic growth. By doing so, they aim to dampen inflationary pressures and maintain price stability.
Therefore, statement 2 provides the correct explanation for statement 1. Central banks believe that by using monetary policy tools, such as interest rate hikes, they can effectively counteract rising consumer prices and control inflationary pressures in the economy.
