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A recent study evaluated the prevailing explanation offered by economi

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A recent study evaluated the prevailing explanation offered by economi  [#permalink]

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New post Updated on: 26 Feb 2019, 20:53
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A recent study evaluated the prevailing explanation offered by economists for the Asian financial crisis that began in Thailand during the late 1990s: that a large increase in foreign investment made the region vulnerable to volatility in currency markets. The study conducted technical analysis of various developing markets and showed that a surge in foreign direct investment did not predict large swings in foreign exchange markets of the underlying currencies. Rather, authors of the study suggested an alternative explanation – that the collapse was due to structural weaknesses in the financial systems of certain Southeast Asian markets. One factor contributing to financial instability was the belief that governments would provide support in the event of systemic failure, commonly known since the 2008 recession as “too big to fail”. This phenomenon created reduced incentives to regulate large financial institutions. The resulting structural weakness was not only masked by the rapid growth of the 1980s and early 1990s, it was exacerbated by the precipitous increase of foreign investment as well as Thailand's insistence on keeping the Baht pegged to the dollar. Given this alternative explanation, which implies policymakers could have prevented the crisis, governments in developing nations should prioritize establishing a strong regulatory structure rather than providing rescue packages. Additionally, governments and regulators should allow currency rates to be determined by market forces rather than arbitrarily peg their values to a reserve currency or basket of currencies. Policymakers could also consider controls on capital outflows after market selloffs, encouraging diversification of economies in manufacturing and technology, and creating a plan for structured liquidation of failed large firms.

1. The passage suggests which of the following about the role of foreign investment in the Asian financial crisis of the 1990s?

A. Regulation of foreign investment through capital controls would likely have exacerbated the crisis.
B. Direct investment was a determining factor that led to large swings in foreign exchange markets.
C. Its role in financial crises may be mitigated through public policy.
D. It resulted in the growth of institutions shielded from systemic failure by implicit government support.
E. Countries that allow currencies to be determined by market forces create more favorable environments for foreign investment.

The phrase the passage suggests in the question stem indicates that this is an inference question. The task of the question is indicated by the word suggests. The subject of the question is something about the role of foreign investment in the Asian financial crisis of the 1990s. In order to answer the question, determine what the passage states about the subject and evaluate the answer choices, eliminating any choice that cannot be supported by the text. According to the passage, the study showed that a surge in foreign direct investment did not predict large swings in foreign exchange markets of the underlying currencies. Rather, authors of the study suggested an alternative explanation – that the collapse was due to structural weaknesses. The passage goes on to state that one factor contributing to financial instability was the belief that governments would provide support in the event of systemic failure, and therefore governments in developing nations should prioritize establishing a strong regulatory structure rather than providing rescue packages.

Choice A: No. This choice may seem appealing due to the recycled language exacerbated and foreign investment, but it is a reversal of one of the key points of the passage. One of the recommendations made by the author of the passage is that governments in developing nations should prioritize establishing a strong regulatory structure rather than providing rescue packages. This implies that stronger regulation could have mitigated, not exacerbated the crisis.

Choice B: No. The recycled language foreign exchange markets may make this choice tempting. However, this answer is a reversal. The author of the passage introduces the perspective that direct investment destabilized currency markets in order to contradict it with the study that is described in the latter part of the passage. The study concluded that a surge in foreign direct investment did not predict large swings in foreign exchange markets of the underlying currencies.

Choice C: Correct. This choice is supported by the passage. This answer refers to the two public policy recommendations made in the passage, that governments in developing nations should prioritize establishing a strong regulatory structure rather than providing rescue packages and governments and regulators should allow currency rates to be determined by market forces rather than arbitrarily peg their values to a reserve currency or basket of currencies. The author suggests that these policies may mitigate the impact of financial crises.

Choice D: No. This choice may seem appealing because it includes two topics discussed at length in the topic, which are foreign direct investment and the growth of institutions shielded from systemic failure by implicit government support. However, this choice is a memory trap. The passage does not draw a causal relationship between foreign investment and the growth of such institutions.

Choice E: No. This choice may seem tempting because the author recommends that governments and regulators should allow currency rates to be determined by market forces rather than arbitrarily peg their values to a reserve currency or basket of currencies, and the author discusses foreign investment. However, the author makes no such comparison between the environment for foreign investment and freely floating currencies, but rather makes the recommendation that freely floating currencies may help mitigate the severity of financial crises in developing markets.

The correct answer is choice C.


2. The first sentence of the passage suggests that the highlighted “economists” would be most likely to predict which of the following?

A. Markets would continue to be prone to rapid change under circumstances of greater legal oversight despite a possibly greater range of investment.
B. Volatility would be mitigated under circumstances of greater regulatory oversight.
C. Financial crises could be contained if financial institutions posed less risk of leading to systemic failure.
D. Removing the Baht peg to the dollar would reduce incentives for foreign investors to invest in Thailand.
E. Markets would be stabilized by foreign investment applied through diversification of portfolios by increasing exposure to other markets.

The phrase the passage suggests in the question stem indicates that this is an inference question. The task of the question is indicated by the word suggests. The subject of the question is something that the highlighted economists would be most likely to predict. In order to answer the question, determine what the passage states about the subject and evaluate the answer choices, eliminating any choice that cannot be supported by the text. According to the passage, the economists believe that a large increase in foreign investment made the region vulnerable to volatility in currency markets. These economists connected the role of foreign investment with the financial crisis at large.

Choice A: Correct. This choice is supported by the passage. The passage states that the economists believed that a large increase in foreign investment made the region vulnerable to volatility in currency markets. Because these economists favored this explanation, they are likely to believe that greater regulatory oversight would not impact volatility. The passage does not indicate that these economists place any connection between regulatory oversight and volatility. This is a connection made by the study, mentioned later, that offers a viewpoint that contrasts with the views of these economists.

Choice B: No. This choice may seem tempting due to the recycled language volatility and regulatory. However, this answer choice is a reversal, as it represents the opposing viewpoints of the study mentioned later, not those of the economists. The passage does not mention that the economists place any connection between volatility and regulatory oversight. Instead, these economists believe that a large increase in foreign investment made the region vulnerable to volatility in currency markets.

Choice C: No. This choice may seem appealing because of the recycled language systemic failure and financial institutions. However, this choice is a reversal, as it represents the opposing viewpoints of the study mentioned later, not those of the economists. The passage does not support that the economists propose a connection between financial crises and systemic failure.

Choice D: No. This choice may seem tempting because of the memorable language Baht pegged to the dollar. However, this choice is a reversal, as it represents the opposing viewpoints of the study mentioned later, not those of the economists. The passage does not indicate that the economists believe there is any connection between the Baht peg to the dollar and incentives to invest in Thailand.

Choice E: No. This choice may seem appealing because of the recycled language diversification and foreign investment, as well as outside knowledge. Although it may generally be true that portfolio diversification may mitigate risk exposure, this connection is not made in the passage. The passage also does not mention the effects of diversifying portfolios on volatility, and it does not state that the economists hold this viewpoint.

The correct answer is choice A.


3. The passage mentions each of the following as an appropriate kind of governmental action EXCEPT

A. encouraging controlled removal of certain types of institutions
B. creating a plan to develop different branches of economy to control impact of the financial service sector
C. removing artificial controls on currency fluctuations
D. setting limits on the percentage of financial resources that can leave a country during times of economic expansion
E. making sure that governments develop strong regulatory structure, even for vital corporations

The phrase the passage mentions indicates that this is a retrieval question. The task of the question is indicated by the phrase the passage mentions each of the following…EXCEPT. The subject of the question is an appropriate kind of governmental action. In order to answer the question, determine what the passage states about the subject and evaluate the answer choices, eliminating any choice that can be supported by the text. Because this is an EXCEPT question, the correct answer choice cannot be supported by the passage. According to the passage, governments in developing nations should prioritize establishing a strong regulatory structure rather than providing rescue packages. Additionally, governments and regulators should allow currency rates to be determined by market forces rather than arbitrarily peg their values to a reserve currency or basket of currencies. Policymakers could also consider limiting capital outflows during market selloffs, encouraging diversification of economies in manufacturing and technology, and creating a plan for structured liquidation of failed large firms.

Choice A: No. This choice is supported by the text. The passage states that policymakers could consider creating a plan for structured liquidation of failed large firms. This would involve removal of these institutions.

Choice B: No. This choice is supported by the text. The passage states that policymakers should consider encouraging diversification of economies in manufacturing and technology. This supports the answer choice, since it is a plan to develop these branches of the economy.

Choice C: No. This choice is supported by the text. The passage states that the crisis was exacerbated by the precipitous increase of foreign investment as well as Thailand's insistence on keeping the Baht pegged to the dollar. This suggests that it would be appropriate for the government to remove these artificial controls and allow the Baht to fluctuate according to market forces.

Choice D: Correct. This choice may seem appealing to eliminate because it correctly states that governments should consider further regulation of large institutions to stabilize the economy. However, it is a reversal because the study described in the passage speculates how to respond during financial crises, not during times of economic expansion.

Choice E: No. This choice is supported by the text. The passage states that governments in developing nations should prioritize establishing a strong regulatory structure. In addition, the passage states that one factor contributing to financial instability was the belief that governments would provide support in the event of systemic failure, commonly known since the 2008 recession as “too big to fail”. This phenomenon created reduced incentives to regulate large financial institutions. Taken together, this suggests that it would be appropriate for governments to take steps to regulate these vital corporations.

The correct answer is choice D.


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Originally posted by Shrattitude on 03 Feb 2019, 07:27.
Last edited by gmat1393 on 26 Feb 2019, 20:53, edited 12 times in total.
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Re: A recent study evaluated the prevailing explanation offered by economi  [#permalink]

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New post 03 Feb 2019, 07:31
Please read Posting rules before you post - This is not proper format for RC

https://gmatclub.com/forum/rc-forum-rul ... 55874.html

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Re: A recent study evaluated the prevailing explanation offered by economi  [#permalink]

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New post 12 Feb 2019, 01:39
can someone post the OEs pls.
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Re: A recent study evaluated the prevailing explanation offered by economi  [#permalink]

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New post 15 Feb 2019, 06:39
surbhi1991 wrote:
can someone post the OEs pls.


1. The passage suggests which of the following about the role of foreign investment in the Asian financial crisis of the 1990s?

A. Regulation of foreign investment through capital controls would likely have exacerbated the crisis.
B. Direct investment was a determining factor that led to large swings in foreign exchange markets.
C. Its role in financial crises may be mitigated through public policy.
D. It resulted in the growth of institutions shielded from systemic failure by implicit government support.
E. Countries that allow currencies to be determined by market forces create more favorable environments for foreign investment.


Official Explanation



The phrase the passage suggests in the question stem indicates that this is an inference question. The task of the question is indicated by the word suggests. The subject of the question is something about the role of foreign investment in the Asian financial crisis of the 1990s. In order to answer the question, determine what the passage states about the subject and evaluate the answer choices, eliminating any choice that cannot be supported by the text. According to the passage, the study showed that a surge in foreign direct investment did not predict large swings in foreign exchange markets of the underlying currencies. Rather, authors of the study suggested an alternative explanation – that the collapse was due to structural weaknesses. The passage goes on to state that one factor contributing to financial instability was the belief that governments would provide support in the event of systemic failure, and therefore governments in developing nations should prioritize establishing a strong regulatory structure rather than providing rescue packages.

Choice A: No. This choice may seem appealing due to the recycled language exacerbated and foreign investment, but it is a reversal of one of the key points of the passage. One of the recommendations made by the author of the passage is that governments in developing nations should prioritize establishing a strong regulatory structure rather than providing rescue packages. This implies that stronger regulation could have mitigated, not exacerbated the crisis.

Choice B: No. The recycled language foreign exchange markets may make this choice tempting. However, this answer is a reversal. The author of the passage introduces the perspective that direct investment destabilized currency markets in order to contradict it with the study that is described in the latter part of the passage. The study concluded that a surge in foreign direct investment did not predict large swings in foreign exchange markets of the underlying currencies.

Choice C: Correct. This choice is supported by the passage. This answer refers to the two public policy recommendations made in the passage, that governments in developing nations should prioritize establishing a strong regulatory structure rather than providing rescue packages and governments and regulators should allow currency rates to be determined by market forces rather than arbitrarily peg their values to a reserve currency or basket of currencies. The author suggests that these policies may mitigate the impact of financial crises.

Choice D: No. This choice may seem appealing because it includes two topics discussed at length in the topic, which are foreign direct investment and the growth of institutions shielded from systemic failure by implicit government support. However, this choice is a memory trap. The passage does not draw a causal relationship between foreign investment and the growth of such institutions.

Choice E: No. This choice may seem tempting because the author recommends that governments and regulators should allow currency rates to be determined by market forces rather than arbitrarily peg their values to a reserve currency or basket of currencies, and the author discusses foreign investment. However, the author makes no such comparison between the environment for foreign investment and freely floating currencies, but rather makes the recommendation that freely floating currencies may help mitigate the severity of financial crises in developing markets.

The correct answer is choice C.
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Re: A recent study evaluated the prevailing explanation offered by economi  [#permalink]

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New post 15 Feb 2019, 06:40
2. The first sentence of the passage suggests that the highlighted “economists” would be most likely to predict which of the following?

A. Markets would continue to be prone to rapid change under circumstances of greater legal oversight despite a possibly greater range of investment.
B. Volatility would be mitigated under circumstances of greater regulatory oversight.
C. Financial crises could be contained if financial institutions posed less risk of leading to systemic failure.
D. Removing the Baht peg to the dollar would reduce incentives for foreign investors to invest in Thailand.
E. Markets would be stabilized by foreign investment applied through diversification of portfolios by increasing exposure to other markets.


Official Explanation:



The phrase the passage suggests in the question stem indicates that this is an inference question. The task of the question is indicated by the word suggests. The subject of the question is something that the highlighted economists would be most likely to predict. In order to answer the question, determine what the passage states about the subject and evaluate the answer choices, eliminating any choice that cannot be supported by the text. According to the passage, the economists believe that a large increase in foreign investment made the region vulnerable to volatility in currency markets. These economists connected the role of foreign investment with the financial crisis at large.

Choice A: Correct. This choice is supported by the passage. The passage states that the economists believed that a large increase in foreign investment made the region vulnerable to volatility in currency markets. Because these economists favored this explanation, they are likely to believe that greater regulatory oversight would not impact volatility. The passage does not indicate that these economists place any connection between regulatory oversight and volatility. This is a connection made by the study, mentioned later, that offers a viewpoint that contrasts with the views of these economists.

Choice B: No. This choice may seem tempting due to the recycled language volatility and regulatory. However, this answer choice is a reversal, as it represents the opposing viewpoints of the study mentioned later, not those of the economists. The passage does not mention that the economists place any connection between volatility and regulatory oversight. Instead, these economists believe that a large increase in foreign investment made the region vulnerable to volatility in currency markets.

Choice C: No. This choice may seem appealing because of the recycled language systemic failure and financial institutions. However, this choice is a reversal, as it represents the opposing viewpoints of the study mentioned later, not those of the economists. The passage does not support that the economists propose a connection between financial crises and systemic failure.

Choice D: No. This choice may seem tempting because of the memorable language Baht pegged to the dollar. However, this choice is a reversal, as it represents the opposing viewpoints of the study mentioned later, not those of the economists. The passage does not indicate that the economists believe there is any connection between the Baht peg to the dollar and incentives to invest in Thailand.

Choice E: No. This choice may seem appealing because of the recycled language diversification and foreign investment, as well as outside knowledge. Although it may generally be true that portfolio diversification may mitigate risk exposure, this connection is not made in the passage. The passage also does not mention the effects of diversifying portfolios on volatility, and it does not state that the economists hold this viewpoint.

The correct answer is choice A.
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Re: A recent study evaluated the prevailing explanation offered by economi  [#permalink]

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New post 15 Feb 2019, 06:41
3. The passage mentions each of the following as an appropriate kind of governmental action EXCEPT

A. encouraging controlled removal of certain types of institutions
B. creating a plan to develop different branches of economy to control impact of the financial service sector
C. removing artificial controls on currency fluctuations
D. setting limits on the percentage of financial resources that can leave a country during times of economic expansion
E. making sure that governments develop strong regulatory structure, even for vital corporations


Official Explanation



The phrase the passage mentions indicates that this is a retrieval question. The task of the question is indicated by the phrase the passage mentions each of the following…EXCEPT. The subject of the question is an appropriate kind of governmental action. In order to answer the question, determine what the passage states about the subject and evaluate the answer choices, eliminating any choice that can be supported by the text. Because this is an EXCEPT question, the correct answer choice cannot be supported by the passage. According to the passage, governments in developing nations should prioritize establishing a strong regulatory structure rather than providing rescue packages. Additionally, governments and regulators should allow currency rates to be determined by market forces rather than arbitrarily peg their values to a reserve currency or basket of currencies. Policymakers could also consider limiting capital outflows during market selloffs, encouraging diversification of economies in manufacturing and technology, and creating a plan for structured liquidation of failed large firms.

Choice A: No. This choice is supported by the text. The passage states that policymakers could consider creating a plan for structured liquidation of failed large firms. This would involve removal of these institutions.

Choice B: No. This choice is supported by the text. The passage states that policymakers should consider encouraging diversification of economies in manufacturing and technology. This supports the answer choice, since it is a plan to develop these branches of the economy.

Choice C: No. This choice is supported by the text. The passage states that the crisis was exacerbated by the precipitous increase of foreign investment as well as Thailand's insistence on keeping the Baht pegged to the dollar. This suggests that it would be appropriate for the government to remove these artificial controls and allow the Baht to fluctuate according to market forces.

Choice D: Correct. This choice may seem appealing to eliminate because it correctly states that governments should consider further regulation of large institutions to stabilize the economy. However, it is a reversal because the study described in the passage speculates how to respond during financial crises, not during times of economic expansion.

Choice E: No. This choice is supported by the text. The passage states that governments in developing nations should prioritize establishing a strong regulatory structure. In addition, the passage states that one factor contributing to financial instability was the belief that governments would provide support in the event of systemic failure, commonly known since the 2008 recession as “too big to fail”. This phenomenon created reduced incentives to regulate large financial institutions. Taken together, this suggests that it would be appropriate for governments to take steps to regulate these vital corporations.

The correct answer is choice D.
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Verb Tenses Simplified

If you found my post useful, KUDOS are much appreciated. Giving Kudos is a great way to thank and motivate contributors, without costing you anything.
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Re: A recent study evaluated the prevailing explanation offered by economi   [#permalink] 15 Feb 2019, 06:41
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