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# Although the European Central Bank (ECB) is subject to far more constr

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Although the European Central Bank (ECB) is subject to far more constr  [#permalink]

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Updated on: 21 Jul 2020, 09:59
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Project RC Butler 2020 - Participate and win GMAT Club Tests.
Passage # 145, Date: 12-Jun-2020
This post is a part of Project RC Butler 2020. Click here for Details

Although the European Central Bank (ECB) is subject to far more constraints than the central banks of single nations, the ECB played a central role in creating the economic growth now enjoyed by the European Union. However, the flaws within the European Union’s monetary system remain and must be addressed. The world financial crisis of the early twenty-first century highlighted three shortcomings that deserve attention.

First, while the European Union centralized money creation in the ECB, the countries of the Union were left with the responsibility of managing their own national budgets. So, at the start of the crisis, governments of the eurozone could not print money to pay creditors. As the crisis worsened, markets began to panic because of the perceived risk of governmental default, and this pressure raised borrowing costs. The ECB stepped in, announcing that it would buy government bonds to maintain control of monetary policy. This action calmed the panic and ended the most acute phase of the crisis.

The second flaw became clear over the next several years, as the eurozone economy languished in recession. The ECB was constrained by its mandate and could not purchase certain assets to stimulate the economy. Other central banks had begun this process much earlier and were able to attenuate the recession in their respective nations.

The final flaw may be the most serious. Although the charter governing the ECB was negotiated by eurozone governments, the ECB is seen by many as a powerful, but unelected, institution that inflicted severe economic pain upon the citizens of its member nations. Recent elections in eurozone countries have seen an increase in the representation of nationalist parties that are increasingly calling for returning control of their country’s currency to the nation itself.

While the founding nations cannot be criticized for failing to foresee the nature and depth of the economic crisis, and thus not structuring European Union monetary policy to cope effectively with such a shock, now that the vulnerabilities have been revealed, the leadership of member nations must initiate the necessary corrections.

1) Which of the following, if true, would most clearly undermine the author's conclusion?

A) Eurozone nations are spending an increasing percentage of their national budgets on social welfare programs that benefit all citizens equally.
B) Making any changes in European Union monetary policy during times of economic expansion may disrupt the markets and threaten the long-term stability of the European Central Bank.
C) The heads of many European Union nations are discussing revisions to the charter that established the role and responsibilities of the European Central Bank.
D) The nationalist parties that have won elections in many eurozone countries would earn greater popular support if their positions regarding monetary policy were enacted.
E) Most voters in the European Union agree there is growing inequality between the economies of the richest and poorest nations served by the European Central Bank.

2) The passage suggests which of the following about the role of European Union money creation policy during the economic crisis of the early twenty-first century?

A) If the European Central Bank had been able to print currency at the beginning of the crisis, the recession could have been avoided.
B) Since printing more currency leads to inflation, limiting this power to the European Central Bank contributed to a shorter, less severe recession in European Union countries.
C) If member nations had properly managed their budgets, the European Central Bank would not have had to issue bonds to assuage the panic in the markets.
D) The flaws in European Union money creation policy prevented the European Central bank from having any beneficial effects on the economy.
E) Although the recovery in the eurozone may have been delayed, European Union money creation policy eventually demonstrated considerable success.

3) The passage suggests which of the following about elections in the European Union?

A) When economic issues appear on the ballot, they must address the needs of every nation in the European Union and so are usually too complex to be understood readily by most voters.
B) Measures allowing democratic input into monetary policies, especially those governing the European Central Bank, are not included on the ballot often enough to satisfy some voters.
C) Reforms of European Union monetary policy have failed to obtain sufficient votes to be approved in the past, but they now enjoy increased support due to the flaws revealed by the financial crisis.
D) Since the influence of nationalist parties is growing, control of national economic policy is expected to soon revert to the individual nations.
E) When voters are able to vote on European Union monetary policy, extensive revisions to the charter that governs the European Central Bank will be made.

4) Which of the following best describes the function of the second sentence in the third paragraph?

A) To contrast restrictions on the actions of the European Central Bank with the latitude afforded other banks
B) To describe restrictions imposed by voters on the European Central Bank
C) To illustrate the inability of the European Central Bank to sell the necessary assets to stimulate the economy
D) To describe the process by which other central banks were able to mitigate the recession in their respective nations
E) To explain the primary reason the European Central Bank struggled to control the effects of the financial crisis

Originally posted by coreyander on 11 Jun 2020, 01:14.
Last edited by bm2201 on 21 Jul 2020, 09:59, edited 3 times in total.
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12 Jun 2020, 10:03
1
1) Which of the following, if true, would most clearly undermine the author's conclusion?

A) Eurozone nations are spending an increasing percentage of their national budgets on social welfare programs that benefit all citizens equally.
B) Making any changes in European Union monetary policy during times of economic expansion may disrupt the markets and threaten the long-term stability of the European Central Bank. only option that undermine's author's conclusion.
C) The heads of many European Union nations are discussing revisions to the charter that established the role and responsibilities of the European Central Bank.
D) The nationalist parties that have won elections in many eurozone countries would earn greater popular support if their positions regarding monetary policy were enacted.
E) Most voters in the European Union agree there is growing inequality between the economies of the richest and poorest nations served by the European Central Bank.

2) The passage suggests which of the following about the role of European Union money creation policy during the economic crisis of the early twenty-first century?

A) If the European Central Bank had been able to print currency at the beginning of the crisis, the recession could have been avoided. 'Avoided' is a strong word. the passage does not suggest that the recession could be avoided.
B) Since printing more currency leads to inflation, limiting this power to the European Central Bank contributed to a shorter, less severe recession in European Union countries.
C) If member nations had properly managed their budgets, the European Central Bank would not have had to issue bonds to assuage the panic in the markets.
D) The flaws in European Union money creation policy prevented the European Central bank from having any beneficial effects on the economy. mentioned in the beginning of the passage that ECB played central role in the economic growth.
E) Although the recovery in the eurozone may have been delayed, European Union money creation policy eventually demonstrated considerable success. The ECB stepped in at a later time but ended the most acute pain of the crisis

3) The passage suggests which of the following about elections in the European Union?

A) When economic issues appear on the ballot, they must address the needs of every nation in the European Union and so are usually too complex to be understood readily by most voters.
B) Measures allowing democratic input into monetary policies, especially those governing the European Central Bank, are not included on the ballot often enough to satisfy some voters. Representation of nationalist parties is increasing because they are calling for the control of currency to return to the country and this is supported by the voters.
C) Reforms of European Union monetary policy have failed to obtain sufficient votes to be approved in the past, but they now enjoy increased support due to the flaws revealed by the financial crisis.
D) Since the influence of nationalist parties is growing, control of national economic policy is expected to soon revert to the individual nations.
E) When voters are able to vote on European Union monetary policy, extensive revisions to the charter that governs the European Central Bank will be made.

4) Which of the following best describes the function of the second sentence in the third paragraph?

A) To contrast restrictions on the actions of the European Central Bank with the latitude afforded other banks The line compared ECB's contraints with the freedom enjoy by other central banks.
B) To describe restrictions imposed by voters on the European Central Bank
C) To illustrate the inability of the European Central Bank to sell the necessary assets to stimulate the economy
D) To describe the process by which other central banks were able to mitigate the recession in their respective nations
E) To explain the primary reason the European Central Bank struggled to control the effects of the financial crisis[/box_in][/box_out][/align][/quote]
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Re: Although the European Central Bank (ECB) is subject to far more constr  [#permalink]

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13 Jun 2020, 03:55
Manager
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Re: Although the European Central Bank (ECB) is subject to far more constr  [#permalink]

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13 Jun 2020, 07:56
1
OFFICIAL EXPLANATION: Question 1

Passage Map:

Paragraph 1: EU monetary system—3 flaws
Paragraph 2: First flaw—ECB manages money supply so member nations can't print money, but nations have their own budgets
Paragraph 3: Second flaw—ECB couldn't purchase certain assets
Paragraph 4: Third, most serious flaw—ECB not elected; member governments elected & voters starting to want more control of economy
Paragraph 5: Author's opinion—system must be reformed

Topic: Role of EU monetary policy in financial crisis of early 21st century
Scope: Three flaws revealed during crisis
Purpose: To discuss flaws and recommend they be corrected

Analyze the question stem

The keyword "undermine" identifies this as a Weaken question. The correct choice will focus on the author's conclusion and identify conditions that will make that conclusion less likely to be true.

Research the relevant text

The author's conclusion is found in the second sentence of the first paragraph and again in the final paragraph. The author recommends that, in the light of the vulnerabilities revealed in the economic crisis, European Union monetary policy be reformed.

Make a prediction

To weaken a recommendation, look for any information that indicates the recommendation may not have the desired result or that changes the conditions on which the recommendation is based. In this case, look for information that indicates reforms are unnecessary or reforms would be unsuccessful.

(B) matches the prediction and is correct. The author's recommendation is based on concern about what occurs during a time of economic crisis, but the first sentence states that the European Union is currently experiencing a period of economic growth. If reforms might disrupt the markets during this time of growth, they might harm, not help, the European Union nations, making it less likely that the author's recommendation is a good one.

(A) and (E) are irrelevant. The passage never discusses social welfare programs (A) or the relative wealth of European Union member countries (E). If you chose (A), you may have thought that more spending on social programs would encourage voters to support the existing system, but the passage does not connect national social welfare policies to eurozone monetary policy.

If anything, (C) is a strengthener. If the leaders of European Union countries, who presumably know something about economic policy, are considering revising the charter of the ECB, it is possible that the reforms the author is calling for are a good idea.

(D) does not have an effect on the argument, since it is never mentioned in the text whether improved political fortunes of nationalist parties would have a beneficial or harmful effect.

TAKEAWAY: Weaken a recommendation by changing the conditions on which the recommendation is based or identifying information that indicates the recommendation would not have the expected results.
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Re: Although the European Central Bank (ECB) is subject to far more constr  [#permalink]

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13 Jun 2020, 07:58
2
OFFICIAL EXPLANATION: Question 2

Passage Map:

Paragraph 1: EU monetary system—3 flaws
Paragraph 2: First flaw—ECB manages money supply so member nations can't print money, but nations have their own budgets
Paragraph 3: Second flaw—ECB couldn't purchase certain assets
Paragraph 4: Third, most serious flaw—ECB not elected; member governments elected & voters starting to want more control of economy
Paragraph 5: Author's opinion—system must be reformed

Topic: Role of EU monetary policy in financial crisis of early 21st century
Scope: Three flaws revealed during crisis
Purpose: To discuss flaws and recommend they be corrected

Analyze the question stem

The keyword "suggests" identifies this as an Inference question. The correct answer will be well supported by the passage.

Research the relevant text

"The role of European Union money creation policy during the economic crisis of the early twenty-first century" is discussed in the second paragraph. Review the paragraph to refresh your memory of the key ideas.

Make a prediction

The author describes the money creation policy of the EU as one of the flaws that should be corrected. Individual nations have their own budgets, but the money supply is controlled by the European Central Bank. Because member nations couldn't print money to pay their creditors, there was growing panic in the markets due to the fear that European governments wouldn't be able to pay their debts. Once the ECB demonstrated that it would buy the bonds of member governments, however, the fear in the markets subsided. Keep these points in mind and eliminate choices that do not align with them.

(E) is correct. The passage opens with a statement that the European Central Bank played a "central role in creating the economic growth now enjoyed by the European Union," and the final sentence of the second paragraph credits the ECB's purchase of government bonds for "calm[ing] the panic and end[ing] the most acute phase of the crisis."

(A) is a distortion. The passage states that the ECB was responsible for money creation and could therefore print currency, but the author never states that this action could have averted the recession.

(B) is a 180, or opposite, choice. The passage identified the ability to print currency as an advantage other nations had over the EU nations in reducing the fears of government default at the start of the financial crisis.

(C) is not mentioned in the passage. While the author does mention the individual national budgets a flaw in the EU monetary system, the management of these budgets is not discussed, nor is it mentioned as contributing to the panic in the markets.

(D) is another 180 choice and extreme as well. Since the passage opens with a statement that the European Central Bank played a "central role in creating the economic growth now enjoyed by the European Union," and the final sentence of the second paragraph credits the ECB's purchase of government bonds with "calm[ing] the panic and end[ing] the most acute phase of the crisis," there were some beneficial effects on the economy.

TAKEAWAY: For an Inference question, validate your choice based on information from the passage before you pick it.
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Re: Although the European Central Bank (ECB) is subject to far more constr  [#permalink]

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13 Jun 2020, 08:00
1
OFFICIAL EXPLANATION: Question 3

Passage Map:

Paragraph 1: EU monetary system—3 flaws
Paragraph 2: First flaw—ECB manages money supply so member nations can't print money, but nations have their own budgets
Paragraph 3: Second flaw—ECB couldn't purchase certain assets
Paragraph 4: Third, most serious flaw—ECB not elected; member governments elected & voters starting to want more control of economy
Paragraph 5: Author's opinion—system must be reformed

Topic: Role of EU monetary policy in financial crisis of early 21st century
Scope: Three flaws revealed during crisis
Purpose: To discuss flaws and recommend they be corrected

Analyze the question stem

The keyword "suggests" identifies this as an Inference question. The content clue "elections in the European Union" narrows the focus to the fourth paragraph.

Research the relevant text

"Elections in the European Union" are discussed in the fourth paragraph. Reread the paragraph and paraphrase the key ideas in your own words.

Make a prediction

The fourth paragraph notes that the European Central Bank is an "unelected institution" and that recent elections have resulted in an increase in the representation of nationalist parties that are demanding returning control of economic policy to individual nations, away from the EU. This is the only place in the passage where elections are discussed, so look for these ideas, but in different words.

(B) matches the prediction and is correct. If voters in the EU consider the ECB "unelected," it is likely that voters do not see related issues turn up on the ballot as often as they would like. At least the nationalist party voters who want to regain control of their national economies are dissatisfied.

(A) is not discussed in the passage. While it seems logical that, since the EU is composed of many nations, economic issues would be complex and perhaps difficult to understand, this idea is not mentioned in the text.

(C) is a 180, or opposite, choice. The issue for some EU voters is that reforms have not appeared on the ballot. There is also no mention of any "past" reform proposals.

(D) and (E) are both extreme. The passage indicates that the nationalist parties are making the demand for control to revert to the individual nations, but not that this will definitely happen "soon" (D). Similarly, the author hints that some of the necessary reforms may include more participation by voters but does not state that elections will result in "extensive revisions" (E).

TAKEAWAY: When you can make a definite prediction, stick to it; just be flexible as you evaluate the choices, since your prediction could be stated in different words.
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Re: Although the European Central Bank (ECB) is subject to far more constr  [#permalink]

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13 Jun 2020, 08:02
1
OFFICIAL EXPLANATION: Question 4

Passage Map:

Paragraph 1: EU monetary system—3 flaws
Paragraph 2: First flaw—ECB manages money supply so member nations can't print money, but nations have their own budgets
Paragraph 3: Second flaw—ECB couldn't purchase certain assets
Paragraph 4: Third, most serious flaw—ECB not elected; member governments elected & voters starting to want more control of economy
Paragraph 5: Author's opinion—system must be reformed

Topic: Role of EU monetary policy in financial crisis of early 21st century
Scope: Three flaws revealed during crisis
Purpose: To discuss flaws and recommend they be corrected

Analyze the question stem

The keyword phrase "describes the function" identifies this as a Logic question. Consider why the author wrote the second sentence in the third paragraph.

Research the relevant text

The content clue is found in the second sentence of the third paragraph, so begin by reviewing the passage map and considering the role of the paragraph in the passage. Then, narrow your focus to consider the phrase in the content clue itself.

Make a prediction

The third paragraph describes the second flaw in European Union monetary policy revealed by the financial crisis: the ECB couldn't act in the same manner as other central banks. The highlighted sentence describes the ECB's situation, while the following sentence discusses "other central banks" that were able to act "much earlier." Thus, the highlighted text is the first half of a comparison. Use this prediction to evaluate the choices.

(A) matches the prediction and is correct.

(B) is a distortion of information in the text. While the ECB's actions were limited, they were limited by its charter, not by the voters.

(C) is a 180, or opposite, choice. The constraint on the ECB was that the bank couldn't purchase certain assets, not that it couldn't sell them.

(D) is a detail from the passage, but it reflects the following sentence, not the one this question asks about.

(E) is extreme. While the ECB's inability to purchase certain assets is identified as one of the factors that hindered the bank's ability to respond to the financial crisis, this factor is not identified as "primary."

TAKEAWAY: When asked for the meaning of selected text in the passage, determine how that text contributes to the author's purpose.
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Re: Although the European Central Bank (ECB) is subject to far more constr  [#permalink]

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21 Jul 2020, 09:55

Please reformat the Spoilers after Timers.Tags are not properly enclosed
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Re: Although the European Central Bank (ECB) is subject to far more constr  [#permalink]

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21 Jul 2020, 10:00
gmat1393 wrote:

Please reformat the Spoilers after Timers.Tags are not properly enclosed

Hi gmat1393,

Done, Thanks.
Re: Although the European Central Bank (ECB) is subject to far more constr   [#permalink] 21 Jul 2020, 10:00