Explanation:
Fiscal dominance occurs when a government's fiscal policy (e.g., tax cuts and increased spending) takes precedence over the central bank's monetary policy objectives. In this scenario:
A is incorrect: This shows central bank independence, not fiscal dominance.
C is incorrect: This describes policy coordination, not dominance.
D is incorrect: This shows a coordinated response to a recession, not necessarily dominance.
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Q.6413 Which of the following scenarios best illustrates the potential for "fiscal dominance"?
A
The central bank raises interest rates to combat rising inflation, even though this increases the government's debt servicing costs.
B
The government cuts taxes and increases spending, and the central bank maintains low interest rates to keep borrowing costs down, despite rising inflation.
C
The central bank and the government agree on a coordinated policy mix, with the central bank focusing on price stability and the government focusing on full employment.
D
The economy experiences a sharp recession, and both the government and the central bank implement expansionary policies to stimulate demand.
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