3. Which of the following statements best reflects/reflect the most logical and rational inference/inferences that can be made from the passage? 1. Central banks cannot bring down inflation without budgetary backing. 2. The effects of monetary policy depend on the fiscal policies pursued by the government. Select the correct answer using the code given below :

1. A. 1 only
2. B. 2 only
3. C. Both 1 and 2
4. D. Neither 1 nor 2

Answer: C

Explanation

Both statements are logical inferences from the passage. The passage explicitly states, “Without the fiscal backup, monetary policy eventually loses traction. Higher interest rates become inflationary, not disinflationary…” This directly supports inference 1, indicating that central banks require fiscal support (budgetary backing) to effectively control inflation. The same sentence also highlights that the effectiveness and outcome of monetary policy are heavily influenced by the government’s fiscal policies. If fiscal policy doesn’t provide backup, monetary policy fails. Therefore, the effects of monetary policy are indeed dependent on fiscal policies, making inference 2 also correct. This question assesses the ability to understand the complex interplay between economic policies as described in the text.