Detailed Explanation:

Answer: Option 1 — Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

In the post-pandemic period, central banks worldwide implemented interest rate hikes to combat rising inflation caused by supply chain disruptions and increased demand. This action was based on the fundamental central banking principle that monetary policy tools, particularly interest rate adjustments, can effectively control inflation by reducing liquidity and dampening demand. Statement-II provides the theoretical foundation and rationale for the practical action described in Statement-I.

✅ Statement-I – Correct: Post-pandemic, many central banks including the US Federal Reserve, RBI, ECB, and Bank of England raised interest rates to combat inflation that peaked globally in 2022-23.

✅ Statement-II – Correct: Central banks operate on the principle that monetary policy, especially interest rate manipulation, can influence aggregate demand and thereby control consumer price inflation.

📝 Short Notes: Monetary Policy and Interest Rates

• Interest Rate Hikes: Central banks increase policy rates (like repo rate in India) to make borrowing expensive, reduce money supply, and curb inflation.
• Monetary Policy Transmission: Rate changes affect commercial lending rates, consumer spending, investment decisions, and ultimately aggregate demand and prices.
• Post-Pandemic Inflation: Supply chain bottlenecks, pent-up demand, fiscal stimulus, and commodity price shocks led to global inflation surge in 2021-23.
• Global Response: US Fed raised rates from near-zero to 5.25-5.50%, ECB from negative to 4%, RBI from 4% to 6.50% during 2022-23.
• Inflation Targeting: Most modern central banks follow inflation targeting framework with mandate to maintain price stability within defined bands.