Correct Option (3)
Both statements 1 and 2 are logical and rational inferences that can be made from the passage.
- Statement 1: The passage explicitly states that "Without the fiscal backup, monetary policy eventually loses traction." This directly implies that central banks, which implement monetary policy, cannot effectively curb inflation without the complementary support of government budgetary measures, such as spending cuts or tax increases.
- Statement 2: The passage explains that "Higher interest rates become inflationary, not disinflationary, because they simply lead governments to borrow more to pay rising debt-service costs" if fiscal discipline is absent. This illustrates that the intended effects of monetary policy are contingent upon the fiscal policies pursued by the government; otherwise, monetary tightening can exacerbate inflationary pressures.
Incorrect Options:
- Option 1 (1 only): This option is incorrect because while statement 1 is a valid inference, statement 2 is also clearly and logically supported by the passage.
- Option 2 (2 only): This option is incorrect because while statement 2 is a valid inference, statement 1 is also clearly and logically supported by the passage.
- Option 4 (Neither 1 nor 2): This option is incorrect as both statements 1 and 2 are direct and logical inferences derived from the information presented in the passage.