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UPSC Prelims 2023 Question on – Central Banks and Interest Rate Hikes
Q. Consider the following statements:
Statement-I: In the recent post-pandemic past, many Central Banks worldwide had carried out interest rate hikes.
Statement-II: Central Banks generally assume that they have the ability to counteract rising consumer prices via monetary policy means.
Which one of the following is correct in respect of the above statements?
✅ Correct Answer: [A] Both Statement-I and Statement-II are correct, and Statement-II is the correct explanation for Statement-I.
Explanation:
- Statement I: Correct. After the COVID-19 pandemic, many central banks across the world increased policy interest rates to tackle rising inflation.
- Statement II: Correct. Central banks use monetary policy tools, especially interest rate adjustments, to influence spending, borrowing, and inflation.
- When inflation rises, central banks typically increase interest rates, making borrowing more expensive and reducing aggregate demand.
- This helps moderate price increases and maintain price stability.
- Therefore, Statement II correctly explains why many central banks implemented interest rate hikes in the post-pandemic period.
