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Bank depositors in the United States are all financially

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Official Guide for GMAT Verbal Review, 2nd Edition

Practice Question
Question No.: 44
Page: 133
Difficulty:


Bank depositors in the United States are all financially protected against bank failure because the government insures all individuals' bank deposits. An economist argues that this insurance is partly responsible for the high rate of bank failures, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

The economist's argument makes which of the following assumptions?

(A) Bank failures are caused when big borrowers default on loan repayments.
(B) A significant proportion of depositors maintain accounts at several different banks.
(C) The more a depositor has to deposit, the more careful he or she tends to be in selecting a bank.
(D) The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
(E) Potential depositors are able to determine which banks are secure against failure.

Similar question: LINK

Originally posted by lexis on 08 May 2008, 12:45.
Last edited by broall on 11 Jun 2017, 05:10, edited 4 times in total.
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Re: Bank depositors in the United States are all financially  [#permalink]

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New post 28 Jun 2013, 14:18
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2
swati007 wrote:
@pqhai,

Hi,

why option D is incorrect?
if X->Y, then assumption could be that Y --x-->X(Y will not cause X)
or A->Y(A will cause Y)
In option D, aint we trying to do this --it assumes other cause (interest rate) as the reason of bank failures?

Someone, Please explain


Hi swati007

I'm glad to help.

GENERAL THEORY
First of all, to get a correct answer in assumption question, the first and most important thing is determine conclusions correctly. Please note that, there is a lot of information in an argument, but you just need to attack the question/assumption you're being asked. That makes GMAT more difficult than normal tests.

Back to this question, the argument uses a famous critical thinking logic "Conditional Reasoning".
The form is:
(1) If A, then B
(2) A
(3) Conclusion: Therefore B


Apply to this question:
(1) If depositors were more selective, then banks would need to be secure in order to compete for depositors' money
(2)..............?????
(3) Therefore, banks would need to be secure in order to compete for depositors' money

Now you see the conclusion more clearly ==> The missing part (2) is the assumption. What is (2)? You can apply the form above, and get the assumption very easy: depositors were able to be more selective in determining which bank is secure.

WHY D IS WRONG?
D say: The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures
Ask yourself: is this the assumption of the conclusion "banks would need to be secure in order to compete for depositors' money". Not at all. The main point of the conclusion is "need more sure to compete for depositors' money". But D talks about "the factor of bank failures". They don't match at any point.


TAKEAWAY:
In Assumption questions, determine the correct conclusions is KEY
There is a lot of info in the argument, Just focus on what you are being asked.

Hope that helps.

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Re: Bank depositors in the United States are all financially  [#permalink]

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New post 08 May 2008, 13:06
I agree

E. The argument depends on the fact that depositors can determine which banks are safe.

B. This weakens by saying that no insurance causes failures which is the opposite of what the economist argue.
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Re: Bank depositors in the United States are all financially  [#permalink]

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New post 08 May 2008, 13:17
2
E & B
1. The economist's argument makes which of the following assumptions?
(A) Bank failures are caused when big borrowers default on loan repayments.-> out of scope
(B) A significant proportion of depositors maintain accounts at several different banks.->irrelevant
(C) The more a depositor has to deposit, the more careful he or she tends to be in selecting
a bank.-> may be, not necessarily the required assumption
(D) The difference in the interest rates paid to depositors by different banks is not a
significant factor in bank failures.-> could be we are not sure
(E) Potential depositors are able to determine which banks are secure against failure.-> correct, thus investor will not invest the banks that are doomed to fail, thus the required assumption

2. Which of the following, if true, most seriously weakens the economist's argument?
Economist's argument->"insurance is partly responsible for the high rate of bank failures" answer choice that says insurance and failure are independent is the best one

(A) Before the government started to insure depositors against bank failure, there was a
lower rate of bank failure than there is now.->supports the economist
(B) When the government did not insure deposits, frequent bank failures occurred as a
result of depositors' fears of losing money in bank failures.-> sounds good
(C) Surveys show that a significant proportion of depositors are aware that their deposits
are insured by the government.->irrelevant
(D) There is an upper limit on the amount of an individual's deposit that the government will
insure, but very few individuals' deposits exceed thislimit.-> irrelevant
(E) The security of a bank against failure depends on the percentage of its assets that are
loaned out and also on how much risk its loans involve.-> irrelevant
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Re: Bank depositors in the United States are all financially  [#permalink]

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New post 08 May 2008, 21:38
2
lexis wrote:
Bank depositors in the United States are all financially protected against bank failure because
the government insures all individuals' bank deposits. An economist argues that this insurance
is partly responsible for the high rate of bank failures, since it removes from depositors any
financial incentive to find out whether the bank that holds their money is secure against failure.
If depositors were more selective, then banks would need to be secure in order to compete for
depositors' money.

1. The economist's argument makes which of the following assumptions?
(A) Bank failures are caused when big borrowers default on loan repayments.
(B) A significant proportion of depositors maintain accounts at several different banks.
(C) The more a depositor has to deposit, the more careful he or she tends to be in selecting
a bank.
(D) The difference in the interest rates paid to depositors by different banks is not a
significant
factor in bank failures.
(E) Potential depositors are able to determine which banks are secure against failure.

2. Which of the following, if true, most seriously weakens the economist's argument?
(A) Before the government started to insure depositors against bank failure, there was a
lower rate of bank failure than there is now.
(B) When the government did not insure deposits, frequent bank failures occurred as a
result of depositors' fears of losing money in bank failures.
(C) Surveys show that a significant proportion of depositors are aware that their deposits
are insured by the government.
(D) There is an upper limit on the amount of an individual's deposit that the government will
insure, but very few individuals' deposits exceed thislimit.
(E) The security of a bank against failure depends on the percentage of its assets that are
loaned out and also on how much risk its loans involve.


Hi lexis,
1.
This is OG. If you dont like the OE of OG, you can be advised by this way.
Let see the red colored boldface. That is from where the economist comes to make his conclusion and also exactly what he want to assume. Should not be lured by other things out of scope.

Basing on that clue, you should rephrase the choice so that the meaning of the correct choice is the same as meaning of the colored above!

Spend time rephrasing and see how E fits with that colore boldface! and let me know! :lol:

2. I hope you see that this argument is kind of causal reasoning. So, to weaken this causal argument, one of the common ways that GMAC want to test you is find out the alternative cause for the observed effect.
a. observed effect: high rate of bank failures
b. cause that economist claimed: goverment insurants
c. find out the alternate cause: ????B
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Re: Bank depositors in the United States are all financially  [#permalink]

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New post Updated on: 29 Jun 2013, 09:22
2
Bank depositors in the US are all financially protected against bank failure because the govenment insures all individuals' bank deposits. An economist argues that this insurance is partly reponsible for the the high rate of bank failure, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

The economist's argument makes which of the following assumption?

1. Bank failures are caused when big borrowers default on loan repayments.
2. A significant proportion of depositors maintain accounts at several different banks
3. The more a depositor has to deposit, the more carefully he or she tends to be in selecting a bank
4. The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
5. Potential depositors are able to determine which banks are secure against failure.

Pls explain your choice. I was confused of "Since...against failure" then I got the wrong choice

Originally posted by Mikko on 07 May 2009, 03:29.
Last edited by Zarrolou on 29 Jun 2013, 09:22, edited 1 time in total.
Added OA.
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Re: Bank depositors in the United States are all financially  [#permalink]

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New post 07 May 2009, 04:17
1
Clear B

Bank depositors in the US are all financially protected against bank failure because the government insures all individuals' bank deposits. An economist argues that this insurance is partly responsible for the the high rate of bank failure, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

The economist's argument makes which of the following assumption?

1. Bank failures are caused when big borrowers default on loan repayments --> this is out of scope, no mentions about the borrowers. This is about the depositors
2. A significant proportion of depositors maintain accounts at several different banks --> best. Because depositors deposit at several different banks, this cause the high rates of banks failures. If they maintain their account in just a few banks, the high rates of failure won't appear and banks must compete more to each other to gain more customers
3. The more a depositor has to deposit, the more carefully he or she tends to be in selecting a bank --> this is not about the amount of deposit money in banks
4. The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures -->interest rate is out of scope
5. Potential depositors are able to determine which banks are secure against failure -->potential depositors are out of scope
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New post 07 May 2009, 05:24
IMO I think its E.

Analyzing choice B:
The argument says An economist argues that this insurance is partly responsible for the the high rate of bank failure
So, the insurance is not fully responsible for the issue at hand.Moreover,even if the depositors held accounts in several different banks, that does not guarantee a high rate of bank failures. Implies not necessary "B" is assumed.

However, only if the potential depositors are aware of the risks of bank failures, can they be more selective.
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Re: Bank depositors in the United States are all financially  [#permalink]

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New post 07 May 2009, 06:05
Mikko wrote:
Bank depositors in the US are all financially protected against bank failure because the govenment insures all individuals' bank deposits. An economist argues that this insurance is partly reponsible for the the high rate of bank failure, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

The economist's argument makes which of the following assumption?

1. Bank failures are caused when big borrowers default on loan repayments.
2. A significant proportion of depositors maintain accounts at several different banks
3. The more a depositor has to deposit, the more carefully he or she tends to be in selecting a bank
4. The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
5. Potential depositors are able to determine which banks are secure against failure.

Pls explain your choice. I was confused of "Since...against failure" then I got the wrong choice


I will agree with E too.

Conclusion:
If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

negate E ..Potential depositors are not able to determine which banks are secure against failure.

then conlcusion falls apart.
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Re: Bank depositors in the United States are all financially  [#permalink]

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New post 07 May 2009, 14:26
Mikko wrote:
Bank depositors in the US are all financially protected against bank failure because the govenment insures all individuals' bank deposits. An economist argues that this insurance is partly reponsible for the the high rate of bank failure, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

The economist's argument makes which of the following assumption?

1. Bank failures are caused when big borrowers default on loan repayments.
2. A significant proportion of depositors maintain accounts at several different banks
3. The more a depositor has to deposit, the more carefully he or she tends to be in selecting a bank
4. The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
5. Potential depositors are able to determine which banks are secure against failure.

Pls explain your choice. I was confused of "Since...against failure" then I got the wrong choice


premise:Bank depositors financially protected against bank failure because the govenment insures

premise:economist argues insurance partly reponsible for bank failure, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure

coclusion: If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.


E undermines the conclusion by questioning whether depositors are able to tell which banks are secure. If they cant, then banks still fail.
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New post 07 May 2009, 17:03
I agree with E. Though B is a contender but you can use Assumption negation technique and see that E is undermining the conclusion
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New post 07 May 2009, 20:44
Still can not get it :(
Tks all anyway

Answer is E
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New post 09 Jun 2009, 05:00
It's E clearly as denying option E means that the customers won't be able to decide whether the bank is secure or not thus shattering the argument.
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New post 13 Jun 2009, 23:35
One more for E.....They depositors will deposit in secured banks...So they must be able to distinguish secure banks from the non secure ones....
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New post 27 Jan 2010, 21:47
Bank depositors in the United States are allfinancially protected against bank failure because the government insures all individuals' bank deposits. An economist argues that this insurance is partly responsible for the high rate of bank failures, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.
The economist's argument makes which of the following assumptions?
(A) Bank failures are caused when big borrowers default on loan repayments.
(B) A significant proportion of depositors maintain accounts at several different banks.
(C) The more a depositor has to deposit, the more careful he or she tends to be in selecting a bank.
(D) The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
(E) Potential depositors are able to determine which banks are secure against failure.

Besides the answer,
which sentence is the conclusion?
a) this insurance is partly responsible for the high rate of bank failures
b) banks would need to be secure in order to compete for depositors' money.

Thanks.
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New post 27 Jan 2010, 22:44
1
Bank depositors in the United States are allfinancially protected against bank failure because the government insures all individuals' bank deposits. An economist argues that this insurance is partly responsible for the high rate of bank failures, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.
The economist's argument makes which of the following assumptions?
(A) Bank failures are caused when big borrowers default on loan repayments.
(B) A significant proportion of depositors maintain accounts at several different banks.
(C) The more a depositor has to deposit, the more careful he or she tends to be in selecting a bank.
(D) The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
(E) Potential depositors are able to determine which banks are secure against failure.

CN = If depositors were more selective in selecting secure banks, then banks would need to be secure in order to compete for depositors' money

IMO E.... this has a direct relation to the CN above and shows a clear assumption. Even if use the Negation Technique, this option weakens the conclusion.

####################################################################################

Besides the answer,
which sentence is the conclusion?
a) this insurance is partly responsible for the high rate of bank failures
b) banks would need to be secure in order to compete for depositors' money.

IMO B is the conclusion!
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New post 23 Mar 2012, 12:16
The answer to the first question is definitely E:

A. This answer choice is definitely not an assumption to the passage. Although it may be true that bank failures are caused by big borrowers, nowhere in the passage can we assume this. It could be that a lot of little borrowers could be the reason for bank failures. We just can't tell by the passage. Therefore, this answer is incorrect.

B. It is possible for depositors to maintain accounts at several different banks, but this is not a central assumption to the passage. Furthermore, why would individuals need to do this if their money is insured by the government? The reason you would want several accounts at different banks it to spread the risk, but if the government will guarantee your money, this would be unnecessary.

C. This somewhat contradicts the argument. The argument states that depositors never really look into the financial status of the banks.

D. Nowhere do we mention anything about interest rates, so this cannot be assumed.

E. This is a good answer choice because reinforces the argument. The economist states that "removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure." For many individuals, they wouldn't know whether a bank is secure or not. Therefore, the economist has made the assumption that all depositors can find information and interpret this information to come to a conclusion whether the bank is secure against failure or not.
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Re: Bank depositors in the United States are all financially  [#permalink]

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New post 11 Apr 2013, 19:42
Mikko wrote:
Still can not get it :(
Tks all anyway

Answer is E


Conclusion: Banks need to be secure to gain more depositors. Why?
Premise: (To gain/target more depositors,) especially for depositors that are more selective. Most depositors do not know which bank is more secure because of insurance.

I chose C, at first, but this is how I come to understand why C is wrong. The economist cannot assume that ALL depositors who need to deposit more money, ALL will be more selective. It is true for some depositors, but not for all depositors. However, the right answer, E, the economist can assume that for POTENTIAL depositors who know which bank is more secure, these POTENTIAL depositors are more selective. This is true for all potential depositors. Thus, E is a more precise worded assumption.
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New post 11 Apr 2013, 22:05
IMO E ->

1. Bank failures are caused when big borrowers default on loan repayments. -->
Out of scope. We don't care about how bank failures happen.

2. A significant proportion of depositors maintain accounts at several different banks -->
Again, this is not so related to what the argument is about.

3. The more a depositor has to deposit, the more carefully he or she tends to be in selecting a bank -->
Classic GMAT shell bomb answer. It adds "degree of comparison" flavor to the answer. But that is not evident in the argument.

4. The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures. -->
Out of scope. Extra information about interest rates paid to depositors. Even if we consider this, it has nothing to do with depositors and bank failures. As such this option negates itself by saying that interest rates is "not a significant factor"

5. Potential depositors are able to determine which banks are secure against failure. -->
This is very solid. Only if potential depositors are able to differentiate between GOOD banks and BAD banks, can they identify which banks are more secure.
Negating this choice tells us that no matter what policy is being implemented, the depositors are too dumb/innocent to spot failure-prone banks!!
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New post 12 Apr 2013, 00:00
1
Mikko wrote:
Bank depositors in the US are all financially protected against bank failure because the govenment insures all individuals' bank deposits. An economist argues that this insurance is partly reponsible for the the high rate of bank failure, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.

The economist's argument makes which of the following assumption?

1. Bank failures are caused when big borrowers default on loan repayments.
2. A significant proportion of depositors maintain accounts at several different banks
3. The more a depositor has to deposit, the more carefully he or she tends to be in selecting a bank
4. The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures.
5. Potential depositors are able to determine which banks are secure against failure.

Pls explain your choice. I was confused of "Since...against failure" then I got the wrong choice


This is one of very classic logics used in GMAT.
YOU WILL DO, ONLY IF YOU"RE ABLE TO DO.

If you negate the assumption, the conclusion is broken.
You are not able to do X, you will not do X.

Apply to this question:
Depositor will select bank carefully, only if they have ability to determine which banks are secure against failure.

If you don't believe, use NEGATION technique.
Depositors do NOT have ability to determine, >>> They will NOT select bank carefully.

E clearly states that.

Hope it helps.
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