As inflation rises, even governments previously committed to budget discipline are spending freely to help households. Higher interest rates announced by central banks are supposed to help produce modest fiscal austerity, because to maintain stable debts while paying more to borrow, governments must cut spending or raise taxes. Without the fiscal backup, monetary policy eventually loses traction. Higher interest rates become inflationary, not disinflationary, because they simply lead governments to borrow more to pay rising debt-service costs. The risk of monetary unmooring is greater when public debt rises, because interest rates become more important to budget deficits.

Based on the above passage, the following assumptions have been made :
1. Fiscal policies of governments are solely responsible for higher prices.
2. Higher prices do not affect the long-term government bonds.
Which of the assumptions given above is/are valid?

The correct option is Neither 1 nor 2.

To understand why both assumptions are invalid, let us analyze each of them step-by-step in the context of the passage provided:

Analysis of Assumption 1: "Fiscal policies of governments are solely responsible for higher prices."
The passage discusses the relationship between inflation, government spending (fiscal policy), and interest rates set by central banks (monetary policy). It mentions that rising inflation prompts governments to spend more, and that monetary policy (higher interest rates) requires fiscal backup (spending cuts or tax hikes) to remain effective. If this backup is missing, higher interest rates themselves can become inflationary because they lead to more borrowing to service debt.
However, the passage never states that fiscal policies are the sole cause of inflation (higher prices). It explains how fiscal and monetary policies interact to influence inflation, but it does not attribute the origin of higher prices exclusively to government fiscal policies. Since the passage does not support the claim of exclusive responsibility, Assumption 1 is invalid.

Analysis of Assumption 2: "Higher prices do not affect the long-term government bonds."
The passage mentions that higher interest rates (introduced to combat rising inflation/higher prices) lead to "rising debt-service costs" and cause governments to "borrow more to pay rising debt-service costs," especially when "public debt rises."
Government bonds are the primary instrument through which governments borrow and manage public debt. The passage shows that higher prices and the resulting monetary policy adjustments (higher interest rates) significantly impact government borrowing and debt dynamics. There is no information in the text to support the claim that higher prices do not affect long-term government bonds. In fact, inflation and interest rate hikes directly influence bond yields and debt-servicing costs. Therefore, Assumption 2 is also invalid.

Because neither of the proposed assumptions can be logically derived or validated from the provided passage, the correct answer is Neither 1 nor 2.