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Conventional wisdom holds that increasing government

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Conventional wisdom holds that increasing government [#permalink] New post 16 Jul 2011, 07:37
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62% (02:50) correct 38% (02:12) wrong based on 128 sessions
Conventional wisdom holds that increasing government spending can boost economic growth, especially during a recession. However, sustaining higher levels of government spending over the long term can limit economic growth. When the government spends more money than it collects from taxes, running a budget deficit, it must issue bonds to borrow the money necessary to make up the difference. The private sector, whose bonds compete with those issued by the government, are forced to pay higher interest rates in order to borrow the money necessary for capital expenditures, such as increasing capacity or starting new businesses. Higher interest rates raise the cost of operating a business, thereby restricting the growth of businesses and the economy.

The bolded phrase in the argument above serves which of the following functions?


It shows that the interest rates paid by private sector business to borrow money are greater than that paid by the government.

It is offered as a reason that deficit spending by the government must be limited.

It supports the conclusion that government spending should not be used to increase economic growth during a recession.

It is a hypothesis supported by the observation that a budget deficit forces the government to borrow money by issuing bonds.

It helps show how government budget decisions indirectly affect the growth of businesses.
[Reveal] Spoiler: OA
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Re: CR [#permalink] New post 16 Jul 2011, 09:59
E.

Key is to understand how increase in govt spending indirectly restricts growth of new /existing business.
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Re: CR [#permalink] New post 16 Jul 2011, 17:50
Easy E!
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Re: CR [#permalink] New post 17 Jul 2011, 23:38
E.
Interesting! This is the first time I have seen a single bold phrase question.

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Re: CR [#permalink] New post 13 Sep 2011, 08:05
E....
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Re: CR [#permalink] New post 14 Sep 2011, 03:24
E is the asnwer. But it took me 3.5 minutes to answer... :(
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Re: CR [#permalink] New post 12 Oct 2011, 11:02
Can somebody please explain me the reason for eliminating C.

Thanks in advance.
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Re: CR [#permalink] New post 24 Oct 2011, 12:22
IndianExpress wrote:
Can somebody please explain me the reason for eliminating C.

Thanks in advance.


C is not correct, because it limits all governmental spendings. It is not correct. The argument says that the government should limit this procedure, but not forbid it, because otherwise corporates could feel negative effects.
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Re: CR [#permalink] New post 24 Oct 2011, 17:30
+1 E
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Re: CR [#permalink] New post 25 Oct 2011, 09:46
I picked E...kind of weird answers to choose from.
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Re: Conventional wisdom holds that increasing government [#permalink] New post 01 Dec 2014, 05:48
Hello from the GMAT Club VerbalBot!

Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).

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Re: Conventional wisdom holds that increasing government   [#permalink] 01 Dec 2014, 05:48
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