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Inflation rose by 5.1% over the 2nd quarter, up from 4.1%

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Inflation rose by 5.1% over the 2nd quarter, up from 4.1% [#permalink] New post 15 Oct 2003, 01:44
00:00
A
B
C
D
E

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Question Stats:

60% (01:00) correct 40% (00:43) wrong based on 4 sessions
Inflation rose by 5.1% over the 2nd quarter, up from 4.1% during the first quarter of the year, and higher than the 3.3% recorded during the same time last year. However, the higher price index did not seem to alarm Wall Street, as stock prices remained steady.

Which of the following, if true, could explain the reaction of Wall Street?

a) Stock prices were steady because of a fear that inflation would continue.

b) The President announced that he was concerned about rising inflation.

c) Economists warned that inflation would persist.

d) Much of the quarterly increase in the price level was due to a summer drought's effect on food prices.

e) Other unfavorable economic news had overshadowed the fact of inflation.
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Re: CR: Wall Street [#permalink] New post 16 Oct 2003, 07:39
araspai wrote:
Inflation rose by 5.1% over the 2nd quarter, up from 4.1% during the first quarter of the year, and higher than the 3.3% recorded during the same time last year. However, the higher price index did not seem to alarm Wall Street, as stock prices remained steady.

Which of the following, if true, could explain the reaction of Wall Street?

a) Stock prices were steady because of a fear that inflation would continue.

b) The President announced that he was concerned about rising inflation.

c) Economists warned that inflation would persist.

d) Much of the quarterly increase in the price level was due to a summer drought's effect on food prices.

e) Other unfavorable economic news had overshadowed the fact of inflation.


- I think D too

This is actually a tricky question if the other options had been better
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 [#permalink] New post 16 Oct 2003, 10:58
I'm pretty confident that A is correct.

The first thing to do is ask yourself what the question asks. The question asks why stock prices are steady even though inflation is increasing.

The correct answer needs to link stock prices to inflation.

D is wrong because it addresses why inflation is occurring but not why stock prices are stable. Even if D were to address stock prices, the evidence in the passage shows that inflation has been rising for a year. A drought last summer could not explain the events inflation before the drought.
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 [#permalink] New post 16 Oct 2003, 15:08
hota wrote:
I'm pretty confident that A is correct.

The first thing to do is ask yourself what the question asks. The question asks why stock prices are steady even though inflation is increasing.

The correct answer needs to link stock prices to inflation.

D is wrong because it addresses why inflation is occurring but not why stock prices are stable. Even if D were to address stock prices, the evidence in the passage shows that inflation has been rising for a year. A drought last summer could not explain the events inflation before the drought.


D suggests that Drought was most probably a temporary phase and temporary caused increase in inflation.

A is tricky and ambigous....it says ""inflation"" would continue , BUT does not say whether "rise in inflation" would continue.

Inflation is there in any " healthy economy"...its the "rise in inflation" thats a problem.

Unless A was a typo, i stick to D.

Thanks
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 [#permalink] New post 16 Oct 2003, 21:04
Hmmm....who has the official answer?!
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 [#permalink] New post 16 Oct 2003, 23:42
Rising inflation is a rising fear for stock prices to go down. For those who are not familiar with finance I explain: inflation rises>>FED rates are raised>>business investments contracted>>stock prices went down; Anyway you donтАЩt need to know this since the question implies that the stock market reaction anticipated would be a slip in prices (not rise or just stable condition) тАУ qualifier ALARM indicates this;
Draught suggests that inflation rose due to supply shrinking, not for the reason that money supply increased. That gives hope for the market that rates will be left unchanged.
imo A is neither tricky nor ambiguous, itтАЩs incorrect.
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 [#permalink] New post 17 Oct 2003, 01:37
Explanation: This is a paradox because the high inflation report would seem to indicate that the stock market should go down. A fear that inflation would continue (A), an announcement by the president that he was concerned about inflation (B), economists' warnings about inflation (C), and other unfavorable economic news (E) would all tend to cause stock prices to decline and cause alarm on Wall Street. What we are looking for instead is an explanation which suggests why a high-inflation report would not spook the markets. (D) is most appropriate. If most of the quarterly inflation was due to a rise in food prices caused by a drought, then other prices rose less or no more than in the last quarter. Since the drought is probably a temporary phenomenon, it may be expected that inflation will decline next quarter. Thus, there is no cause for alarm on Wall Street, and the high-inflation report should not scare the equity markets.


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  [#permalink] 17 Oct 2003, 01:37
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