Consider the following statements:

1. Tight monetary policy of US Federal Reserve could lead to capital flight.

2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).

3. Devaluation of domestic currency decreases the currency risk associated with ECBs.

Which of the statements given above are correct?

Question

Question

This question was previously asked in

UPSC Civil Services Exam Official 2022 Prelims General Studies held on 5th June

Answer 1

The correct answer is Option 1.

THIS QUESTION HAS BEEN DELETED BY THE UPSC.

Key PointsTight monetary Policy

Tight monetary policy refers to the actions that a central bank takes to limit inflation and an overheating economy. Tight monetary policy is commonly called contractionary monetary policy.
Tight monetary policy, or contractionary monetary policy, typically occurs when a central bank wants to keep inflation under control.
If there has been too much spending and borrowing by consumers and businesses, the economy can become overheated and that could considerably raise the price level of goods and services.
Inflation is the rise in the price level of items, such as groceries or clothes, over time.
To minimize or slow down inflation, a central bank could make it more expensive for consumers to spend money and businesses to borrow money by raising interest rates. This is a form of contractionary monetary policy—it restricts, or contracts, spending.