SBI PO Mains English Sectional Mock Test 04

1. Read the following passage carefully and answer the questions given after it. Central banks have traditionally guarded their independence by speaking as little as possible. A generation ago, a governor's remarks were deliberately cryptic, on the theory that markets should be kept guessing. That approach has been turned on its head. Today most central banks publish inflation forecasts, release the minutes of their policy meetings and offer 'forward guidance' about the likely path of interest rates. The aim is to shape expectations: if households and firms believe that inflation will stay near the target, they set prices and wages accordingly, and the central bank's task becomes easier. Transparency, however, carries its own risks. Forward guidance works only if it is credible, and credibility is hard to maintain when the economy is hit by shocks that no one foresaw. A central bank that signals steady rates and is then forced to raise them sharply may find that its next message is discounted. Some economists therefore argue for guidance that is explicitly conditional, tied to clearly stated indicators rather than to dates. Others worry that too much communication creates noise, as markets react to every speech by every official. The deeper challenge is that central banks are now asked to do more than control inflation. They are expected to safeguard financial stability, support growth and, increasingly, consider climate risks. Each new objective requires judgement, and judgement is harder to explain than a single numerical target. Clear communication remains essential, but it cannot substitute for a clear mandate.

   Q1.According to the passage, why did central banks once keep their statements deliberately unclear?

   • A.Governments did not allow them to speak.
   • B.They believed markets should be kept guessing to protect central bank independence.
   • C.They had no data on inflation.
   • D.Markets had requested less information.
   • E.They wanted to hide losses from the public.

2. Q2.What is the main purpose of forward guidance, as described in the passage?

   • A.To replace the inflation target
   • B.To reduce the number of policy meetings
   • C.To announce the exact date of every rate change
   • D.To shape the expectations of households and firms about inflation and interest rates
   • E.To discourage households from saving

3. Q3.Why may a central bank's next message be 'discounted', according to the author?

   • A.Because the message is published too late
   • B.Because markets always ignore central banks
   • C.Because governors change every year
   • D.Because inflation forecasts are secret
   • E.Because an earlier signal turned out wrong after an unforeseen shock

Start the test to answer these. Correct answers and explanations are shown after you submit.