Economist: In the middle of the twentieth century, continuous

Question

Economist: In the middle of the twentieth century, continuous technological innovation mitigated the effects of an economic recession in the United States. But since that time, such innovation has increasingly been done by small companies funded by profit-minded venture capitalists, and that venture-capital funding—which has become critical to economic vitality—plunges when the economy enters a recession. After the 1987 stock market crash, for example, venture capital fell by more than 50 percent, from $5.2 billion in 1987 to $2.5 billion in 1991.

The economist’s statements above can best serve as part of an argument for which of the following hypotheses?

A. The 1987 stock market crash was a result of venture capitalists’ focus on profits.
B. The likelihood of an economic recession in the U.S. increased after the middle of the twentieth century due to a shift toward venture-capital funding.
C. Putting limits on venture-capital funding during a recession can mitigate the effects of that recession in the U.S.
D. The method used after the mid-twentieth century for funding U.S. technological innovations can intensify the severity of a recession.
E. Technological innovation was more important to the U.S. economy at the end of the twentieth century than in the middle of that century.

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Official Answer

D

MartyMurray · Accepted Answer

Explanation

Economist: In the middle of the twentieth century, continuous technological innovation mitigated the effects of an economic recession in the United States. But since that time, such innovation has increasingly been done by small companies funded by profit-minded venture capitalists, and that venture-capital funding—which has become critical to economic vitality—plunges when the economy enters a recession. After the 1987 stock market crash, for example, venture capital fell by more than 50 percent, from $5.2 billion in 1987 to $2.5 billion in 1991.

We see that the passage is made up of factual statements about the effects of technological innovation being funded by venture capitalists.

The economist’s statements above can best serve as part of an argument for which of the following hypotheses?

If statements "serve as part of an argument" for a hypothesis, they support the hypothesis.

So, this question is a Conclusion question, and the correct answer will be a conclusion supported by the passage.

A. The 1987 stock market crash was a result of venture capitalists’ focus on profits.

Regarding "the 1987 stock market crash," the passage says the following:

After the 1987 stock market crash, for example, venture capital fell by more than 50 percent

We see that, unlike what this choice says, the passage says that the crash caused a decrease in venture capital, rather than that venture capitalists caused the crash.

Eliminate.

B. The likelihood of an economic recession in the U.S. increased after the middle of the twentieth century due to a shift toward venture-capital funding.

This choice is pretty tricky. In fact, I initially thought it might be correct, but here's what's going on.

This choice may seem to be supported by the passage since the passage says the following:

In the middle of the twentieth century, continuous technological innovation mitigated the effects of an economic recession in the United States. But since that time, such innovation has increasingly been done by small companies funded by profit-minded venture capitalists

Seeing that contrast between what occurred "in the middle of the twentieth century" and what has occurred "since that time" with innovation increasingly "done by small companies funded by ... venture capitalists," we could get the impression that this choice is correct.

At the same time, we have to notice some key things in the passage.

The first thing we have to notice is that it says, "In the middle of the twentieth century, continuous technological innovation  mitigated  the effects of an economic recession." Something that "mitigated the effects" of a recession didn't prevent a recession from occurring. Mitigating something is making it less problematic than it would have been, not preventing it.

The second is that the passage says, "venture-capital funding—which has become critical to economic vitality—plunges when the economy enters a recession." Notice that this issue doesn't arise unless the economy "enters a recession." So, the issue is not that venture-capital funding causes recessions. The issue is that venture capital funding plunges when a recession occurs.

Simply put, the passage doesn't say that what occurred in the middle of the twentieth century prevented recessions or that venture capital causes recessions to be more likely.

Thus, nothing the passage says indicates that "The likelihood of an economic recession in the U.S. increased after the middle of the twentieth century due to a shift toward venture-capital funding."

Eliminate.

C. Putting limits on venture-capital funding during a recession can mitigate the effects of that recession in the U.S.

Notice that the passage doesn't say that recessions are worse because there's too much venture-capital funding during a recession. It indicates that recessions are worse because "venture-capital funding ... plunges when the economy enters a recession." In other words, the issue is that there's less venture-capital funding during a recession.

So, the passage indicates that, contrary to what this choice says, putting limits on venture-capital funding during a recession wouldn't help at all. It could even make things worse.

Elimimate.

D. The method used after the mid-twentieth century for funding U.S. technological innovations can intensify the severity of a recession.

We might be tempted to eliminate this choice because it doesn't mention "venture-capital funding."

Notice, however, that "The method used after the mid-twentieth century for funding U.S. technological innovations" mentioned by this choice matches perfectly with "venture-capital funding" in the passage. After all, the passage says, "since that time, such innovation has increasingly been done by small companies funded by profit-minded venture capitalists."

So, we can presume that "the method" mentioned in this choice is "venture-capital."

So, does the passage support the idea that venture capital "can intensify the severity of a recession"? Yes it does. After all it says the following:

In the middle of the twentieth century, continuous technological innovation mitigated the effects of an economic recession in the United States.  But  since that time, such innovation has increasingly been done by small companies funded by profit-minded venture capitalists.

We see that the passage uses the contrast word "but" to communicate that, because of innovation being funded by venture capitalists, innovation no longer mitigates the effects of a recession. Then, the statements that follow explain why.

So, this choice is logically supported by the passage.

Keep.

E. Technological innovation was more important to the U.S. economy at the end of the twentieth century than in the middle of that century.

This choice may seem correct because, according to the passage, there has been a change in the relationship between innovation and the economy. That change is that, in the middle of the twentieth century, innovation mitigated the effects of a recession, but now it doesn't.

At the same time, this choice is not supported by the passage and even in a way is contrary to what the passage implies. After all, the fact that innovation no longer mitigates recessions the way it did doesn't mean it's less important. In fact, what the passage says suggests that innovation is still important and therefore could still mitigate recessions but doesn't because of how it's funded.

Eliminate.

Correct answer:  D

sachi-in · Answer

Reccession mitigated by Tech Innovation ( TI )
Tech Innovation ( TI ) currently handled by Venture Capital
Venture Capital ( VC ) is reduced by Recession

If TI were funded by something else other than VC like in 1950s then, ( TI ) they would continue even during phases of recessions and mitigate the effect of recession.

Hence
 Ability to mitigate recession is reduced due to current system ( which is correctly stated in choice D )

The likelihood of an economic recession is affected by venture-capital funding ( option B )  is clearly wrong.

Recession will occur at it's own pace but it's affect is mitigated by TI ( which is fueled by VCs in recent times )

The key trick the question plays upon is the confusion between the two terms (This is probably a 700 level question) :  
A. Migitates the EFFECT of Recession ( stated in passage )
B. Mitigates the Recession

If we are careless we will assume tech innovation reduce the recession ( which would mean VCs reduce likelihood of Recession - option B which is wrong )

Option D is correct.

GmatKnightTutor · Answer

Economist: In the middle of the twentieth century, continuous technological innovation mitigated the effects of an economic recession in the United States. But since that time, such innovation has increasingly been done by small companies funded by profit-minded venture capitalists, and that venture-capital funding—which has become critical to economic vitality—plunges when the economy enters a recession. After the 1987 stock market crash, for example, venture capital fell by more than 50 percent, from $5.2 billion in 1987 to $2.5 billion in 1991.

The passage talks about how around the 50s, constant tech innovation helped reduce the EFFECTS of a recession in the US. How that sort of innovation, however, is being driven more and more from that time by venture-capital funded companies that are profit driven. How this sort of funding dries up when we start to get into a recession.

If the passage was your ARGUMENT, what would be a good THEORY for it?

D. The method used after the mid-twentieth century for funding U.S. technological innovations can intensify the severity of a recession.

(D) is the answer. If more and more tech innovation is being funded by a type of funding that dries up once a recession starts, the MITIGATING effect tech innovation used to have once a recession starts won't be there as much. Imagine if 90% of total tech innovation suddenly stopped once a recession started compared to before when only 20% used to stop.

Vanshikakataruka · Answer

Hello 
In B you have explained that Venture cepital funding is not the reason for recession and the same has been stated in C. 
"So, the issue is not that venture-capital funding causes recessions. The issue is that venture capital funding plunges when a recession occurs."

But in Supporting D you have said that Venture capital does cause recession. 
Also in D doesnt the argument say that "Venture capital funding mitigated the effect of recessions by technological innovation"?

Contropositive · Answer

MartyMurray   AjiteshArun   KarishmaB   DmitryFarber

I was torn between (C) and (D), and i chose (C) over (D). Request you to help me understand why my thought process is incorrect:

So, i thought, i should choose the option which is MOST closely aligned with and MOST supported by the argument above.
 
Argument says: technological innovation  mitigated  the effects of an economic recession.
But this option says: ''intensify''.
I thought, ''X'' reduces the effect of ''Y'', doesn't mean removal of ''X'' will INTENSIFY the severity.
 
''Putting limits'' means: the limitation of something is the act or process of  controlling  or  reducing  it.

So if one controls the VC's funding, you will not allow the ''funding plunges'', and hence CAN ''mitigate'' the effects of severity of recession.

Where did i go wrong?

DmitryFarber · Answer

Contropositive

First, don't focus on the MOST aspect. I know they say that in the question stem just to be safe, but you should expect one answer that WORKS and 4 that DO NOT work. If you're on the right track, it shouldn't feel like you're picking the best of several answers. The wrong answers are wrong.

Second, we don't need an answer that is 100% proven. We just need something that builds reasonably on the given premises. Notice that both C and D say *can*--this isn't about proving what must always happen.

In this case, C is not supported by the given statements. If anything, they might establish the opposite. If these days, funding for innovation comes from VC, then limiting VC funding might limit innovation, thus taking away a source of recession mitigation. We can't assume that if VC were limited, some other source of funding would appear.

As for D, yes, it's safe to say that if we take away something that mitigates a problem, that problem can intensify. This just has to be relative to what would otherwise happen. Without sufficient innovation to mitigate a recession, the recession is worse in relative terms.

reed990 · Answer

Anyone can help me to solve the puzzle of understanding "putting limits on":
The TPA below has the original OG question bank word as "The aid industry should begin to limit its efforts to spending on primary schools ...", where the "limit the efforts to" turned out to mean focus, or emphasize more efforts;

https://gmatclub.com/forum/professor-a- ... l#p3351741

Here, I thought the "putting limits on" in C meant limit the effort on captical venture, which would help to mitigate the recession.

DmitryFarber · Answer

reed990

When we limit or restrict something, that usually means we're doing less of it, making it harder for others to do it, or making more rules about how/when it can be done. We're literally placing a limit on how much it happens.

The two uses you describe are not contradictory. If, for instance, I place a limit on fishing in the local lake, that means that one cannot freely fish there. Maybe it can only happen at certain times, or in certain amounts, or maybe only certain fish may be taken. If I limit fishing TO the hours of 9 to 5, I am still limiting fishing--it can't be done at night! If I limit my exercise routine to running and push-ups, then I am not doing any other kind of exercise. This *may* mean that I end up doing a lot of running and push-ups, but that's not necessary. I might do those exercises all day long, or I might do them once a year. I just don't do any others.

Now take a look at your examples:

"putting limits on venture-capital funding" = restricting the amount of funding that comes from venture capital. This doesn't mean to spend more on VC, or to do it at all. It just means that there is some maximum limit placed on the spending.

"limit its efforts to spending on primary schools" 
Here, the limit is being placed on EFFORTS, not spending. The only effort that will be made is to spend some money on primary schools. This doesn't mean that a lot will be spent, but as with my exercise example, nothing *else* is going to be done. So if the organization has a lot of money to spend, then limiting its efforts to this one kind of spending will mean that a lot is spent there. Similarly, if I exercise for 3 hours a day and I limit my exercise to running, then I will end up doing a great deal of running!
(Interestingly, the problem you've cited seems to have been changed to say "focus efforts" rather than limit. But the idea is still the same. They're doing one kind of thing and not doing others.)

Raman109 · Answer

Understanding the argument - 
Economist: In the middle of the twentieth century, continuous technological innovation (TI) mitigated the effects of an economic recession in the United States. - Understand it correctly. Its not saying that TI reduces the likelihood of recession. Its saying it mitigates the effects of recession. Meaning the recession will still be there but it'll be less severe.

But since that time, such innovation has increasingly been done by small companies funded by profit-minded venture capitalists, and that venture-capital funding—which has become critical to economic vitality—plunges when the economy enters a recession. After the 1987 stock market crash, for example, venture capital fell by more than 50 percent, from $5.2 billion in 1987 to $2.5 billion in 1991.

The economist’s statements above can best serve as part of an argument for which of the following hypotheses?

A. The 1987 stock market crash was a result of venture capitalists’ focus on profits. - no. "stock market crash" is out of the scope of the hypothesis.

B. The likelihood of an economic recession in the U.S. increased after the middle of the twentieth century due to a shift toward venture-capital funding. - The "likelihood of recession" is out of scope.

C. Putting limits on venture-capital funding during a recession can mitigate the effects of that recession in the U.S. - out if scope.

D. The method used after the mid-twentieth century for funding U.S. technological innovations can intensify the severity of a recession. - Yes. The argument says "increasingly."

E. Technological innovation was more important to the U.S. economy at the end of the twentieth century than in the middle of that century. - this comparison is out of scope.

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Economist: In the middle of the twentieth century, continuous

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