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Here we have three items: A, B, and C. In this case, Europe, China, and Japan. There is no need for the 'that' before Japan. That eliminates (A) and (B).

Next, we have the subject 'knowledge', which is singular. Therefore the verb is 'was.' And just like that, we are at answer (D) .
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Christopher Lele
Magoosh Test Prep

In choice D, the pronoun IT is very ambiguous. IT can be development, knowledge. So, choice C is better and clarifies the meaning of sentence.
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Note also that (D) is an improperly constructed comparison. We're not sure if "It informed his literary style as much as (it informed) the content of his fiction" or if "it informed his literary style as much as the content of his fiction (informed his literary style."
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Eli Meyer
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Let us start with a simple sentence and see how it is ambiguous:

Second world war influenced scientific advancement as much as quest for knowledge.

This can be interpreted in two ways:

Second world war influenced scientific advancement as much as (Second world war influenced) quest for knowledge. In other words, second world war influenced:

a. scientific advancement and
b. quest for knowledge.

However, another way of interpreting this is:

Second world war influenced scientific advancement as much as quest for knowledge (influenced scientific advancement). In other words, scientific advancement was influenced by:

a. Second world war
b. quest for knowledge

Now, coming to this sentence, Ryunosuke Akutagawa’s knowledge informed the following two things:

1. Literary style
2. Content of his fiction

With D, the sentence would be:

Ryunosuke Akutagawa‘s knowledge of the literatures of Europe, China and Japan was instrumental in his development as a writer, as it informed his literary style as much as the content of his fiction.

Now, here is the tricky thing. The above sentence can be interpreted as:

Ryunosuke Akutagawa‘s knowledge of the literatures of Europe, China and Japan was instrumental in his development as a writer, as it informed his literary style as much as the content of his fiction (informed his literary style)

Which means Ryunosuke Akutagawa’s literary style was informed by the following:

1. Ryunosuke Akutagawa’s knowledge
2. Content of his fiction

So, there is an ambiguity of meaning, if D is the answer choice. Now, perhaps this ambiguity might be “tolerated” in some sentence in GMAT, if there is no better option; but here, C is definitely clearer.
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Verb-ing is is answering here How ... Correct
As works as causal relationship ...I was late to college as it was raining heavily. (sorry but i don't think pronoun ambiguity is a issue as pointed out by others)
Here causal relationship is not there so as is not required.

Just to add As can work -> to show causal relationship( like above)
to show comparison ( as (it is the case) with many other girls, my gf loves shopping ; Ron teaches us english as a school teacher does)
to show simultaneous actions ( As I was crossing the road in the market area , I noticed my GF with a stranger at the coffee center)
to show roles ( As sources of electrical power, windmills now account for only about 2,500 megawatts nationwide)
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Ryunosuke Akutagawa‘s knowledge of the literatures of Europe, China and that of Japan were instrumental in his development as a writer, informing his literary style as much as the content of his fiction.

a)that of Japan were instrumental in his development as a writer, informing his literary style as much as
Wrong. "that of" + "were" + "as much as" are wrong.

b)that of Japan was instrumental in his development as a writer, and it informed his literary style as well as
Wrong. "that of" is wrong.

c)Japan was instrumental in his development as a writer, informing both his literary style and
Correct. Parallelism + S-v agreement.

d)Japan was instrumental in his development as a writer, as it informed his literary style as much as
Wrong. "as much as" is wrong. The use of "it" is not clear. "it" should modify "knowledge", but in this question, "it" modifies "his development".

e)Japan were instrumental in his development as a writer, informing both his literary style in addition to
Wrong. "were" is wrong.

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