Question map
Consider the following statements : Statement-I : In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes. 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?
Explanation
The correct answer is Option 1. This is because both statements are factually accurate, and Statement-II provides the underlying logical rationale for the actions described in Statement-I.
- Statement-I is correct: Following the COVID-19 pandemic, global economies faced high inflation due to supply chain disruptions and pent-up demand. Consequently, major Central Banks (like the US Federal Reserve and the RBI) aggressively hiked interest rates to stabilize their economies.
- Statement-II is correct: It reflects the fundamental principle of monetary policy. Central Banks operate on the premise that increasing interest rates reduces liquidity, discourages excessive borrowing, and cools down demand, thereby controlling rising consumer prices (inflation).
Connection: Statement-II explains the "why" behind Statement-I. Central Banks hiked rates specifically because they assume these monetary tools are effective instruments to counteract inflationary pressures. Thus, Statement-II is the correct explanation for the actions taken in Statement-I.
PROVENANCE & STUDY PATTERN
Guest previewThis is the quintessential 'Applied Macroeconomics' question. It fuses the biggest headline of the year (Global Rate Hikes) with the most basic chapter of the syllabus (Monetary Policy Theory). Strategy: Never read a financial headline without mapping it back to the static 'Why'āin this case, the transmission mechanism.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Directly states that many central banks worldwide carried out interest rate hikes in the post-pandemic period.
- Explicitly ties the timing to the 'post-pandemic recent past,' matching the 2021ā2023 period in the statement.
- Describes central banks 'accelerat[ing] interest rate hikes,' indicating widespread tightening actions.
- Notes consequences across multiple jurisdictions, implying these hikes were implemented by many banks.
- Collects multiple case studies titled 'Central bank responses to the postāCOVID period of high inflation,' covering many national banks (Australia, Canada, euro area, Japan, Sweden, Switzerland, US, Brazil).
- The breadth of listed central bank responses implies coordinated or widespread policy actions in response to post-COVID inflation.
States that governments and central banks worldwide enacted monetary stimulus measures in response to COVIDā19, indicating a prior phase of accommodation.
A student could note that an earlier global easing creates a plausible policy cycle where central banks later tighten (e.g., raise rates) as conditions normalise, and then check 2021ā23 rate data by country/region.
Summarises a policy recommendation (from GFSR) that when the pandemic is under control authorities should 'gradually withdraw liquidity support.'
Withdrawing liquidity support is often implemented via raising policy rates or reversing asset purchases; a student could therefore look for announcements of rate hikes in 2021ā23 as the pandemic waned.
Documents a specific COVIDā19 easing: the RBI temporarily reduced banks' Liquidity Coverage Ratio (LCR) requirements in 2020 and phased them back later.
This concrete example of regulatory easing and later restoration suggests a broader pattern (ease in 2020, normalise later) that a student can test by examining whether central banks moved from easing to tightening in 2021ā23.
Records another accommodative step (increasing MSF borrowing limit and referencing MSF interest relative to the repo rate) taken in April 2020 to reduce COVIDā19 impact.
Shows central bank support measures and provides a baseline (accommodation in 2020) that a student could contrast with central bank policy statements and policy interest series for 2021ā23 to detect hikes.
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