Current Affair



1. Context 

British Prime Minister Rishi Sunak was quick to reject a call from the new First Minister of Scotland and leader of the governing Scottish National Party (SNP), Humza Yousaf, to hold a second referendum for Scotland's independence from the U.K.

2. Scotland demanding independence

  • The independent Kingdom of Scotland was formed in the 19th century and went on to fight wars to remain independent from the Kingdom of England.
  • In 1603, the two kingdoms entered a personal union and were then ruled by the same monarchs.
  • In 1707, due to economic and political vulnerabilities prevailing on both sides, the British and Scottish Parliaments passed the Acts of Union, entering into a political union under the name of  Great Britain.
  • While Scotland could retain some of its decision-making powers it did not get equal representation in the united Parliament and longstanding cultural and political differences remained.
  • Demands for self-governance soon began to sprout, eventually leading to two referendums in 1979 and 1997, resulting in the formation of a new devolved Parliament of Scotland in 1999.
  • This Parliament was given the mandate to form legislation on devolved issues such as health, transport, education and so on, while the power to legislate on defence, foreign policy, trade, immigration and currency was reserved.
  • The last referendum for independence took place in 2014, where 55 per cent of Scots voted to stay in the three centuries-old unions while 45 per cent voted to walk out.
  • A large proportion of Scots see independence from the U.K. as a question of self-determination and identity.
  • Scotland accounts for 8 per cent of Britain's population and economy and one-third of its landmass.

3. Reasons for demand for Independence

  • The SNP government says that people who live in Scotland should have the right to decide if they want to be an independent country.
  • To relinquish doubts over the future of Scotland after independence, the SNP has been coming out with White papers on its vision for "Building a new Scotland".
  • It currently gets a bloc grant from the British government for a large part of its annual expenditure which it plans to substitute with oil revenues from the North Sea once its gets independence.
  • It says that instead of using the North Sea oil revenues to invest in future generations, the U.K. is using them to fund its current expenses, which undermines the interests of Scots.
  • It also plans to rejoin the EU, expand its trade in the bloc and receive other associated benefits.
  • The SNP also plans to keep using the British pound Sterling as its currency after independence.
  • It also argues that Scotland is different from the U.K. in that its electoral system is already fairer and more proportionally represented than the U.K....
  • It says it stands for different things more open immigration policies, a faster push for green transition free university education and geriatric care, taxation on higher earners and inclusion of the LGBTQ community.
  • It also believes that the U.K. could make other decisions like Brexit in the future that would undermine Scottish interests.

4. U.K.'s Stand

  • The British government believes that the SNP has failed to give a clearer picture of how issues of pensions and healthcare would work in an independent Scotland.
  • It has also warned Scotland that if it rejoins the EU, it would lead to the creation of a hard border between Scotland and Britain.
  • Before the 2014 referendum, the Economic Affairs Committee of Westminister had highlighted that retaining the sterling as Scottish currency would be problematic as the Monetary Policy Committee of the Bank of England, which forms policy for the U.K., could not entertain the interests of a separate country.
  • It also said that Scotland would find it difficult to assume its share of the U.K.'s public debt, which runs into billions.
  • Besides, the decommissioning of North Sea Oil would also have economic and trade implications for Britain.
  • The biggest impact of Scotland's leaving the centuries-old Union in the current geopolitical environment would be on "Perceptions of Englishness among the English themselves, who make up 85 per cent of the U.K.'s population and the projection of Englishness as a national identity in the world.

5. The way forward

  • The Scotland government has planned to hold 2023, a consultative plebiscite a nonbinding referendum in Scotland without a green light from Westminster.
  • In November 2022, however, the U.K. top court ruled that such a referendum could not take place.
  • Refusing to give up the SNP party's push for independence, it declared a new strategy that the next British general election or the Scottish Parliament election as a "de facto referendum" for independence, where the SNP would stand on the sole issue of Independence.
  • Recent polls show that the support for a "yes" vote on independence has dropped to 39 per cent in the country, less than it was during the 2014 referendum.

For Prelims

For Prelims: Scotland, Britain, de facto referendum

Previous year questions

1. Consider the following pairs: (UPSC 2020)
River                  Flows into
1. Mekong         Andaman Sea
2. Thames          Irish Sea
3. Volga             Caspian Sea
4. Zambezi        Indian Ocean
Which of the pairs given above is/are correctly matched?
A. 1 and 2 only      B. 3 only       C. 3 and 4 only      D. 1, 2 and 4 only
Answer: C
2. Match the pairs: (MPSC 2017)
a. Land of Cakes                        I. Thailand
b. Land of Canals                      II. Netherlands
c. Land of Thousand Lakes      III. Finland
d. Land of White Elephants       IV. Scotland
1. a - IV, b - II, c - III, d - I
2. a - II, b - IV, c - III, d - I
3. a - IV, b - III, c - I, d - II
4. a - III, b - I, c - II, d - IV
Answer: 1
Source: The Hindu



1. Context

In the absence of a price for the use of natural resources such as air and forests, environmental destruction has been part of every country's recipe for boosting GDP growth. But the consequence of this approach has been the relentless emission of carbon, causing runaway climate change. It is time, starting with the biggest economies of the G20, to agree on valuing nature, including by pricing carbon effluents. As president of the G20 this year, India can take the lead in carbon pricing, which will open unexpected avenues of decarbonization.

2. What is Carbon Pricing?

  • Carbon pricing is an instrument that captures the external costs of greenhouse gas (GHG) emissions- the costs of emissions that the public pays for, such as damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise and ties them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted.
  • A price on carbon helps shift the burden for the damage from GHG emissions back to those who are responsible for it and who can avoid it. Instead of dictating who should reduce emissions where and how, a carbon price provides an economic signal to emitters, and allows them to decide to either transform their activities and lower their emissions, or continue emitting and paying for their emissions.

3. Main types of carbon Pricing

An emissions trading system (ETS) is a system where emitters can trade emission units to meet their emission targets. To comply with their emission targets at the least cost, regulated entities can either implement internal abatement measures or acquire emission units in the carbon market, depending on the relative costs of these options. An ETS establishes a market price for GHG emissions by creating supply and demand for emissions units. The two main types of ETSs are cap-and-trade and baseline-and-credit:

  • Cap-and-trade systems, which apply a cap or absolute limit on the emissions within the ETS, and emissions allowances are distributed, usually for free or through auctions, for the number of emissions equivalent to the cap.
  • Baseline-and-credit systems, where baseline emissions levels are defined for individual regulated entities, and credits are issued to entities that have reduced their emissions below this level. These credits can be sold to other entities exceeding their baseline emission levels.
  • A carbon tax directly sets a price on carbon by defining an explicit tax rate on GHG emissions or more commonly on the carbon content of fossil fuels, i.e. a price per tCO2e. It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is.
  • A crediting mechanism designates the GHG emission reductions from the project- or program-based activities, which can be sold either domestically or in other countries.  Crediting Mechanisms issue carbon credits according to an accounting protocol and have their own registry. These credits can be used to meet compliance under an international agreement, domestic policies, or corporate citizenship objectives related to GHG mitigation.
  • RBCF is a funding approach where payments are made after pre-defined outputs or outcomes related to managing climate change, such as emission reductions, are delivered and verified. Many RBCF programs aim to purchase verified reductions in GHG emissions while at the same time reducing poverty, improving access to clean energy, and offering health and community benefits.

4. Ways of carbon pricing

  • Three ways of pricing carbon are the establishment of a carbon tax domestically, as in Korea and Singapore; the use of an emissions trading system (ETS), as in the European Union (EU) and China; and the application of an import tariff on the carbon content, as the EU is proposing.
  • Some 46 countries price carbon, although covering only 30% of global greenhouse gas (GHG) emissions, and at an average price of only $6 a ton of carbon, a fraction of the estimated harm from the pollution.
  • The International Monetary Fund has proposed price floors of $75, $50, and $25 a ton of carbon for the United States, China, and India, respectively.
  • It believes this could help achieve a 23% reduction in global emissions by 2030.  

5. Impact on India

  • Among the three ways of pricing, India could find a carbon tax appealing as it can directly discourage fossil fuels while raising revenues which can be invested in cleaner sources of energy or used to protect vulnerable consumers.
  • It could replace the more inefficient scheme of petroleum taxes which are not directly aimed at emissions.
  • By the way, Saudi Arabia and Russia are at the low end of gasoline prices (including
    taxes and subsidies), China and India in the mid­range, and Germany and France at the high end.
  • In most countries, including India, fiscal policy has set in place the basic structures needed to implement a carbon tax.
  • For example, they can be woven into road­fuel taxes, which are established in most places, and extended to industry and agriculture.
  • India could start with the IMF figure of $25 a ton.
  • The main obstacle is the argument by industrial firms about losing their competitive advantage to exporters from countries with a lower carbon price.
  • It would stand to reason, therefore, for all high, middle, and low­ income countries to set the same rate within each bracket.
  • It might also make sense to allow companies to use high­quality international carbon credits to offset up to a certain percentage of their taxable emissions.
  • The EU excludes transport, where higher costs would have been passed on to consumers directly, Singapore provides vouchers for consumers hit by utility price rises, and California uses proceeds from the sales of carbon permits partly to subsidize purchases of electric cars.
  • Some make a case for exempting “emission intensive trade exposed” enterprises from the carbon tax, but output­based rebates would be superior ways of doing the same.

For Prelims & Mains

For Prelims: Carbon Pricing, Greenhouse gas (GHG) emissions, Gross Domestic Product, An emissions trading system (ETS), European Union (EU), International Monetary Fund.
For Mains: 1. What is Carbon Pricing? Discuss the main types of Carbon pricing and how it will impact India.
Previous year Question
1. Which of the following statements best describes the term 'Social Cost of Carbon'? It is a measure, in monetary value, of the (UPSC 2020)
 A. long-term damage done by a tonne of CO2 emission in a given year.
B. requirement of fossil fuels for a country to provide goods and services to its citizens, based on the burning of those fuels.
C. efforts put in by a climate refugee to adapt to live in a new place.
D. contribution of an individual person to the carbon footprint on the planet Earth.
Answer: A
Source: The Hindu


1. Context
The EU is pushing for 100 cities including Paris, Madrid and Amsterdam to reach net-zero emissions by the end of the decade  far earlier than their national governments plan to get there
As governments across the world have promised to stop polluting carbon emissions by 2050, scores of European cities have pledged to get there by 2030  just seven years from now
2. Background
  • The European Union wants 100 cities  including capitals Paris, Madrid and Amsterdam  to be carbon neutral by the end of the decade
  • Berlin, which is not on the list, held a referendum in March on moving its target forward to 2030
  • Despite a slim majority in favour of the plans, too few people voted overall for the law to pass
  • Cities aiming to meet the target by 2030 would have to make unprecedented changes to the way their citizens move, live, eat and sleep
  • In sectors like transport and buildings, the technologies to do so exist. The pathway is much less clear for industry and agriculture
  • Supporters and scientists have highlighted that the shift to net-zero emissions by 2030 would quickly clean up the air, make streets safer and buildings more comfortable
3. Reasons Why Cities would hit Net-Zero Emissions in 2030
  • To keep global temperatures from rising by more than 1.5 degrees Celsius (2.7 degrees Fahrenheit)  the target to which world leaders promised to try to limit global warming  humanity must cut pollution fast
  • The Intergovernmental Panel on Climate Change found that the world needs to cut carbon emissions to net-zero by the middle of the century
  • Net-zero means societies have to suck out as much carbon as they pump into the atmosphere
  • But technologies to remove carbon dioxide are limited and scientists are unsure how much they can absorb
  • Still, that finding has led more than 100 countries to set net-zero targets for around 2050
  • Pressure is also rising on rich countries who have polluted the most, particularly those in Europe and North America, to move faster
  • While 2050 is a global average, nearly all countries signed the Paris Agreement on Climate Change, which accepts that countries have “common but differentiated responsibilities.”
  • Experts say cities are good targets for faster action because they pump out a disproportionate share of greenhouse gases  partly because they have more people and tend to be richer
  • Just 10 city regions in Europe are responsible for 7.5% of the continent’s total carbon dioxide emissions, a 2022 study found. The 100 dirtiest cities are responsible for 20% of the emissions
  • Doing more  or doing anything  is always necessary and good because it will help us achieve our climate goals
  • Still, bringing a city’s emissions down to zero or even close to it is hard
  • In a sector like transport, officials could force out combustion engine cars, improve public transport and make streets easier to walk
  • But electrifying the energy supply may require changes that need regional or national support
  • The program helps members overcome structural, institutional and cultural barriers, with the idea that lessons from one can be applied to another
  • Because most cities have only just started, it is unclear how likely they are to succeed
  • If a good number of cities are able to achieve the goal as specified  and a larger number demonstrates they are able to move much more quickly to the outcome, even if they do not quite make it by 2030
  • In some sectors, like heavy industry, technological solutions are some way off. Facilities to capture carbon and store it safely underground have not yet achieved the efficiency needed to clean up cement plants, for instance. That makes full decarbonization a challenge for more industrial cities
  • Port cities like Rotterdam, in the Netherlands, and Hamburg, in Germany will also struggle to clean up without help at a national or European level
4. Way Forward
Denmark’s capital Copenhagen started to tackle its 2025 climate neutrality goal in 2012
The city expects to reduce emissions by about 82% in 2025 compared to 2010, a spokesperson for the city’s climate team told DW, mainly from heating and electricity
Transport emissions were harder to clean up, the spokesperson said, and a plan to capture carbon from a waste incinerator plant will not be completed in time
Carbon capture is a highly viable and currently possibly the only option for waste incinerators to become carbon neutral.
For Prelims: Carbon Credit, Net Zero Emissions, Paris Agreement
For Mains:
1. Can European cities go Climate neutral by 2030? Also, Discuss Why Cities need to Achieve Net Zero Emissions by 2030? (250 Words)
Previous Year Questions:
1.Regarding “carbon, credits”, which one of the following statements is not correct? (UPSC 2011)

A.The carbon credit system was ratified in conjunction with the Kyoto Protocol

B. Carbon credits are awarded to countries or groups that have reduced greenhouse gases below their emission quota

C. The goal of the carbon credit system is to limit the increase of carbon dioxide emission

D. Carbon credits are- traded at a price fixed from time to time by the United Nations Environment Programme

Solution (b)

2. Which of the following best describes the term 'Social Cost of Carbon' It is a measure, in monetary value, of the (UPSC 2020)

A. Long-term damage done by a tonne of CO2 emission in a given year

B. Requirement of Fossil fuels for a Country to provide goods and services to its citizens, based on the burning of those fuels

C. Efforts put in by a Climate refugee to adapt to live in a new place

D. Contribution of an individual person to the carbon footprint on the planet Earth

Answer (A)

Source: indianexpress


1. Context
Whenever talking about gut health, ‘probiotics’ are likely to crop up during the conversation. As such, it would not be wrong to say that it has become a buzzword when it comes to gut health
In the last few years there has been a huge surge in probiotics. It seems as though everywhere you look there are probiotics: in teas, chocolates, gummies, cookies… it leaves you to wonder, are they actually that beneficial or have they now become a marketing tactic
2. What are Probiotics?
Probiotics are live microorganisms promoted with claims that they provide health benefits when consumed, generally by improving or restoring the gut microbiota
Probiotics are considered generally safe to consume but may cause bacteria-host interactions and unwanted side effects in rare cases
Probiotics are a combination of live beneficial bacteria and/or yeasts that naturally live in your body. Bacteria is usually viewed in a negative light as something that makes you sick. However, you have two kinds of bacteria constantly in and on your body  good bacteria and bad bacteria

 This community is made up of things called microbes. You have trillions of microbes on and in your body. These microbes are a combination of:

  • Bacteria.
  • Fungi (including yeasts).
  • Viruses.
  • Protozoa.
3. Benefits of Probiotics
They influence our body’s immune response, and help our body’s community of microorganisms return to a healthy condition after being disturbed

Good bacteria keeps you healthy by supporting your immune function and controlling inflammation. Certain types of good bacteria can also:

  • Help your body digest food.
  • Keep bad bacteria from getting out of control and making you sick.
  • Create vitamins.
  • Help support the cells that line your gut to prevent bad bacteria that you may have consumed (through food or drinks) from entering your blood.
  • Break down and absorb medications.
4. Limitations
  • While probiotic foods can be beneficial for digestive health, they should not be considered a cure-all for digestive issues.
  • It is advisable to consult a healthcare provider and a qualified dietician before adding probiotic-rich foods to the diet, especially in case of any underlying medical condition
  • The data shows it does not help those with Crohn’s disease, nor does it help those with pancreatitis
  • Probiotics are live microorganisms, the ‘friendly’ bacteria that reside in the gut and provide numerous benefits. These bacteria help us fight infections caused by ‘unfriendly” ones’
  • An estimated 100 trillion microorganisms representing more than 500 different species inhabit every normal, healthy bowel
  • The most common are bacteria that belong to groups called Lactobacillus and Bifidobacterium
  • Other bacteria may also be used as probiotics, and so may yeasts such as Saccharomyces boulardii
Source: Cleavelandclinic



1. Context

2021-22 and 2022-23 have both seen unusual rabi (winter-spring) cropping seasons in terms of weather and yield loss, especially in wheat. But the patterns of rainfall and temperature variation and the damage to the standing crop, as a result,  have been different in the two seasons. The 2021-22 season was marked by too much rain. The country received rainfall that was way above the “normal” long-period average every month from September 2021 to January 2022. This was followed by the hottest-ever March in terms of average maximum temperatures.

2. Wheat Production

  • The unusual heat of March 2022 led to lower wheat production, as the spike in temperatures happened during the grain formation and filling stage when the kernels were accumulating starch and proteins.
  • That stage determines the size and weight of the harvested grains were cut short with maximum temperatures crossing 35 degrees Celsius by mid-March.
  • While the Agriculture Ministry claimed last year’s wheat output at 107.74 million tonnes (mt) a marginal decline of 1.7% from the all-time-high 109.59 mt of 2020- 21 the private trade estimated the crop to be 10-15% lower at 93-98 mt.
  • This was borne out by the government’s own procurement falling to 18.79 mt, as against 43.34 mt in the previous marketing season, and wholesale wheat inflation crossing 20% year-on-year by December even after a ban on exports. 

3. Why has 2022-23 been different?

  • If 2021-22 was largely wet, with five consecutive months of excess/surplus rain, 2022-23 was quite the opposite.
  • The winter was exceptionally dry, with the four months from November 2022 to February 2023 registering deficient rainfall.
  • February 2023 not only recorded 68.3% below-normal rain, but it was also the hottest ever February in terms of the average maximum temperature, just as March was in 2022.

4. About Wheat Crop

  • Wheat is a Rabi Crop grown between September and December and harvested between February and May.
  • The total area under the crop is about 29.8 million hectares in the country.
  • In 2020, wheat production for India was 107,860 thousand tonnes. Wheat production in India increased from 23,832 thousand tonnes in 1971 to 107,860 thousand tonnes in 2020 growing at an average annual rate of 3.42%.
  • Indian wheat is largely a soft/medium-hard, medium protein, white bread wheat, somewhat similar to U.S. hard white wheat.
  • Durum wheat, often known as pasta wheat or macaroni wheat is also one of the best-quality wheat varieties in India.

5. Major Wheat Producing States

Image Source: Farmer's Portal

6. Climate Requirement

  • The wheat crop has wide adaptability. It can be grown not only in the tropical and subtropical zones but also in the temperate zone and the cold tracts of the far north, beyond event the 60-degree north altitude.
  • Wheat can tolerate severe cold and snow and resume growth with the setting in of warm weather in spring. It can be cultivated from sea level to as high as 3300 meters.
  • The best wheat are produced in areas favored with cool, moist weather during the major portion of the growing period followed by dry, warm weather to enable the grain to ripen properly.
  • The optimum temperature range for ideal germination of wheat seed is 20-25 C though the seeds can germinate in the temperature range of 3.5 to 35 c.
  • Rains just after sowing hamper germination and encourage seedling blight. Areas with a warm and damp climate are not suited for wheat growing.
  • During the heading and flowering stages, excessively high or low temperatures and droughts are harmful to wheat.
  • Cloudy weather, with high humidity and low temperatures, is conducive to rust attack.
  • The wheat plant requires about 14-15 C optimum average temperature at the time of ripening. The temperature conditions at the time of grain filling and development are very crucial for yield.
  • Temperatures above 250C during this period tend to depress grain weight.
  • When temperatures are high, too much energy is lost through the process of transpiration by the plants, and the reduced residual energy results in poorer grain formation and lower yields.

7. Soil

  • Wheat is grown in a variety of soils in India. Soils with a clay loam or loam texture, good structure, and moderate water-holding capacity are ideal for wheat cultivation.
  • Care should be taken to avoid very porous and excessively drained oils.
  • Soil should be neutral in its reaction. Heavy soil with good drainage is suitable for wheat cultivation under the conditions.
  • These soils absorb and retain rainwater well. Heavy soils with poor structure and poor drainage are not suitable as wheat is sensitive to water logging.
  • Wheat can be successfully grown on lighter soils provided their water and nutrient holding capacity are improved.

8. Will the rain affect wheat yields?

  • Wheat is sensitive to both heat stress and rain/thunderstorms during the terminal gain filling and ripening period.
  • This is the time when the crop's earheads are heavy with grains.
  • The more weight accumulated from grain-filling, the more vulnerable is the crop to rain.
  • These, when accompanied by high-velocity winds, make the stems prone to "lodging" or bending and even falling flat on the ground.

9. Would wheat prices go up if production falls?

  • It is unlikely because wheat prices at the Chicago Board of Trade futures exchange are now at just over $254 per tonne compared to the $500-plus peaks that were scaled last March.
  • Last year’s failed domestic crop came at a time when global commodity prices were on fire following Russia’s invasion of Ukraine.
  • The world has since overcome the effects of the war. Even in the unlikeliest possibility of India’s wheat output falling to the 2021-22 level or lower, a resurgence of cereal inflation looks improbable.

For Prelims 

For Prelims: Wheat Crop, white bread wheat, Durum wheat, tropical and subtropical zones, Ministry of Agriculture.

Previous year Question

1. Consider the following crops: (UPSC 2013)
1. Cotton
2. Groundnut
3. Rice
4. Wheat
Which of these are Kharif crops?
A. 1 and 4
B. 2 and 3 only
C. 1, 2 and 3
D. 2, 3 and 4
Answer: C
Source: The Indian Express


1. Context 

The Monetary Policy Committee (MPC) of India's central's bank, the RBI will deliberate whether interest rates should be hiked further or not.

2. Key Points

  • Since May last year, the existing EMIs for home loans, car loans or loans for business have been going up quite rapidly.
  • This has been happening because the RBI has been repeatedly raising something called the repo rate.
  • The repo rate is the rate at which the RBI lends money to the banking system.
  • A hike in repo implies that banks and other financial institutions charge higher interest rates.

3. Reasons for raising interest rates

  • The RBI has been doing this in its bid to contain inflation.
  • RBI hopes that a higher EMI on an existing loan or a costlier new loan would dissuade enough people from borrowing money to fund future economic activity.
  • The resultant slowdown in activity and demand for money will likely bring down inflation, which is essentially described as "too much money chasing too few goods".
  • Since the RBI, which is the main agency charged with the responsibility of maintaining price stability in the Indian economy, cannot increase the supply of goods and services such as crude oil, cabbage and haircuts, it acts in a manner that reduces the demand for all goods and services.
  • This week, too, it is expected that the RBI will end up raising the repo rate by 2 basis points.
  • But just like the past two repo rate hikes in February and December, this decision is unlikely to be a unanimous one; More importantly, it will likely be widely debated for soundness.
  • That's because both within the MPC and outside, many believe that any further rate hikes will result in crimping India's economic growth and worsening unemployment.

4. Pros and Cons of raising interest rates

  • The main problem with hiking interest rates to contain inflation that may be getting caused by costlier crude oil (due to war or some geopolitical tension) or costlier vegetables (due to some unseasonal rains) is that the hike per se cannot improve the supply of those goods and services.
  • Raising rates is, in no uncertain terms, a blunt instrument. It achieves the goal of containing prices by killing growth and employment. Many have questioned this approach in the past.
  • The standard textbook answer to this criticism is: A central bank does this not so much to address the actual inflation which it can't control if it is driven by supply constraints but to prevent the  "Second-order effects" of high inflation.
  • The second-order effects refer to a spike in people's expectations of future inflation. 
  • This matters because if people do not see inflation as a minor blip and instead view inflation as here to stay and likely to worsen, they will do what any normal person should be expected to do: Ask their boss for a salary increment.
  • But, this can quickly turn into a self-fulfilling prophecy. If workers are allowed to demand higher wages in anticipation of higher inflation, then businesses will start charging higher prices in anticipation of higher input costs (real wages).
  • Lo and behold, the economy will find itself in the middle of persistently high inflation.
  • It has been shown that once inflation expectations become "unanchored" in this manner, policymakers find it quite tough to bring down inflation.

 5. The problem with breaking this cycle of inflation expectations

  • The trouble is, and this is one of the relatively ignored aspects of monetary policy, that inflation control by this method relies heavily on denying the common people, who are most affected by high prices, the chance to raise their wages in line with the already high prices of the first round.
  • Worse still, higher interest rates make it difficult for the relatively worse off to get cheap credit to buy a home and create wealth.
  • In essence, a contractionary monetary policy the kind being practised the world over at present essentially increases inequality in an economy.
  • To be sure, inequality is the distance between the haves and the have-nots in any economy.
  • In an academic paper published in January by the Federal Reserve, the board shows that " equality of access of the most important asset class for most households are also dependent on monetary policy.
  • The tighter policy leads to greater inequality in ownership, in contrast to the literature that finds reduced wealth inequality based on asset prices.
  • The effects of homeownership on wealth take time to accumulate, so the influence of this access channel on wealth inequality would accrue only with a considerable lag.
  • When the US Central Bank raises interest rates, it places something as basic as home ownership out of the reach of common people.
  • This reduces the people's ability to have access to an asset that creates wealth and this "wealth inequality" (relative to the wealthy) hits the poorer people with a lag.

6. Raising interest rates creates inequality

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