Conventional wisdom has it that large deficits in the United States bu

Question

NEW PROJECT!: Back to basic => Give your explanation- Get Kudos Point for best explanation   
  Passage-17   GMATPrep RCs-Collection  (Main article)

Conventional wisdom has it that large deficits in the United States budget cause interest rates to rise. Two main arguments are given for this claim. According to the first, as the deficit increases, the government will borrow more to make up for the ensuing shortage of funds. Consequently, it is argued, if both the total supply of credit (money available for borrowing) and the amount of credit sought by nongovernment borrowers remain relatively stable, as is often supposed, then the price of credit (the interest rate) will increase. That this is so is suggested by the basic economic principle that if supplies of a commodity (here, credit) remain fixed and demand for that commodity increases, its price will also increase. The second argument supposes that the government will tend to finance its deficits by increasing the money supply with insufficient regard for whether there is enough room for economic growth to enable such an increase to occur without causing inflation. It is then argued that financiers will expect the deficit to cause inflation and will raise interest rates, anticipating that because of inflation the money they lend will be worth less when paid back.

Unfortunately for the first argument, it is unreasonable to assume that nongovernment borrowing and the supply of credit will remain relatively stable. Nongovernment borrowing sometimes decreases. When it does, increased government borrowing will not necessarily push up the total demand for credit. Alternatively, when credit availability increases, for example through greater foreign lending to the United States, then interest rates need not rise, even if both private and government borrowing increase.

The second argument is also problematic. Financing the deficit by increasing the money supply should cause inflation only when there is not enough room for economic growth. Currently, there is no reason to expect deficits to cause inflation. However, since many financiers believe that deficits ordinarily create inflation, then  admittedly  they will be inclined to raise interest rates to offset mistakenly anticipated inflation. This effect, however, is due to ignorance, not to the deficit itself, and could be lessened by educating financiers on this issue.   1 
 C 
1. Which of the following best summarizes the central idea of the passage?

(A) A decrease in nongovernment borrowing or an increase in the availability of credit can eliminate or lessen the ill effects of increased borrowing by the government.
(B) Educating financiers about the true relationship between large federal deficits and high interest rates will make financiers less prone to raise interest rates in response to deficits.
(C) There is little support for the widely held belief that large federal deficits will create higher interest rates, as the main arguments given to defend this claim are flawed.
(D) When the government borrows money, demand for credit increases, typically creating higher interest rates unless special conditions such as decreased consumer spending arise.
(E) Given that most financiers believe in a cause-and-effect relationship between large deficits and high interest rates, it should be expected that financiers will raise interest rates.

2 
 C 
2. It can be inferred from the passage that proponents of the second argument would most likely agree with which of the following statements?

(A) The United States government does not usually care whether or not inflation increases.
(B) People in the United States government generally know very little about economics.
(C) The United States government is sometimes careless in formulating its economic policies.
(D) The United States government sometimes relies too much on the easy availability of foreign credit.
(E) The United States government increases the money supply whenever there is enough room for growth to support the increase

3 
 E 
3. Which of the following claims concerning the United States government's financing of the deficit does the author make in discussing the second argument?

(A) The government will decrease the money supply in times when the government does not have a deficit to finance.
(B) The government finances its deficits by increasing the money supply whenever the economy is expanding.
(C) As long as the government finances the deficit by borrowing, nongovernment borrowers will pay higher interest rates.
(D) The only way for the government to finance its deficits is to increase the money supply without regard for whether such an increase would cause inflation.
(E) Inflation should be caused when the government finances the deficit by increasing the money supply only if there is not enough room for economic growth to support the increase.

4 
 A 
4. The author uses the term " admittedly " (see highlighted text) in order to indicate that

(A) the second argument has some truth to it, though not for the reasons usually supposed
(B) the author has not been successful in attempting to point out inadequacies in the two arguments
(C) the thesis that large deficits directly cause interest rates to rise has strong support after all
(D) financiers should admit that they were wrong in thinking that large deficits will cause higher inflation rates
(E) financiers generally do not think that the author's criticisms of the second argument are worthy of consideration

GMATNinja · Accepted Answer

Let's pull this out of the weeds of macroeconomic policy for a minute. Here's a less jargony example:

"Dave and Charlie are playing on an active train track, with insufficient regard for whether an oncoming train could kill them."

This does NOT mean that Dave and Charlie  don't care  about  whether they live or die . They're just being careless when  choosing where to play , making this decision without thinking about its potentially lethal consequences.

Now, let's return to the passage and your doubt:
 
Take one more look at the entire sentence that you've highlighted. Does the wording of choice (A) really match what you see? Does this sentence really tell us that the government  does not usually care  about  whether or not inflation increases ?

The answer is no. The second argument zeroes in on a pretty specific scenario, where:

The government can finance its deficits by increasing the money supply. 
  The economy could have room for this increase, in which case inflation won't occur. 
  The economy could NOT have room for this growth, in which case inflation would occur.

And the second argument claims that the government does not devote enough attention to  whether there is enough room for economic growth . This does NOT imply that the government  doesn't care about inflation itself . Rather, it implies that the government  is not sufficiently careful  when considering  whether its actions could lead to inflation . This is much better matched by choice (C):

I hope this helps!

AmoyV · Answer

Time taken: 07:46 mins

1. Which of the following best summarizes the central idea of the passage?
A. A decrease in nongovernment borrowing or an increase in the availability of credit can eliminate or lessen the ill effects of increased borrowing by the government. passage never says the borrowing is evil. Neither does it shows ways to reverse the effects of government borrowing 
B. Educating financiers about the true relationship between large federal deficits and high interest rates will make financiers less prone to raise interest rates in response to deficits. There is no educating financers. Financers are merely a case in point that how half truths can lead to faulty reasons to adopt a policy. 
C. There is little support for the widely held belief that large federal deficits will create higher interest rates, as the main arguments given to defend this claim are flawed. Yes. It brings into question the validity of a popular belief, highlights 2 arguments used to rationalise this popular belief and calls the arguments into question. 
D. When the government borrows money, demand for credit increases, typically creating higher interest rates unless special conditions such as decreased consumer spending arise.  Decreased consumer spending doesnt come into the picture anywhere in the passage 
E. Given that most financiers believe in a cause-and-effect relationship between large deficits and high interest rates, it should be expected that financiers will raise interest rates. This is just one of the arguments targetted by the author. This point is used to show how a popular belief can lead to faulty adoption of policies.

2. It can be inferred from the passage that proponents of the second argument would most likely agree with which of the following statements?
A. The United States government does not usually care whether or not inflation increases. There is nothing in the passage to support this 
B. People in the United States government generally know very little about economics. There is nothing in the passage to support this 
C. The United States government is sometimes careless in formulating its economic policies. Could be true. It does seem to resonate with the tone of the passage 
D. The United States government sometimes relies too much on the easy availability of foreign credit. Passage never discourages nor encourages foreign credit. 
E. The United States government increases the money supply whenever there is enough room for growth to support the increase. Goes against the passage. Passage states that there are times when money supply is increased even when there is no room for growth in the economy.

3. Which of the following claims concerning the United States government's financing of the deficit does the author make in discussing the second argument?
A. The government will decrease the money supply in times when the government does not have a deficit to finance. Argument never says this. It does say that the govt may increase the money supply when it has a deficit to finance. 
B. The government finances its deficits by increasing the money supply whenever the economy is expanding. "economy expanding"? OFS since this term is not used in the passage 
C. As long as the government finances the deficit by borrowing, nongovernment borrowers will pay higher interest rates. Disctinction between govt and non-govt borrowers is not used in the 2nd argument. That distinction is only used in the 1st argument. 
D. The only way for the government to finance its deficits is to increase the money supply without regard for whether such an increase would cause inflation. "only way"? The argument never uses any restrictive terms like that. 
E. Inflation should be caused when the government finances the deficit by increasing the money supply only if there is not enough room for economic growth to support the increase. Perfect.

4. The author uses the term "admittedly" (see highlighted text) in order to indicate that
A. the second argument has some truth to it, though not for the reasons usually supposed Yes. The argument only has truth to it because financiers believe popularly held belief and make a decision based on that. 
B. the author has not been successful in attempting to point out inadequacies in the two arguments Nothing in the passage to believe this 
C. the thesis that large deficits directly cause interest rates to rise has strong support after all On the contrary the passage argues the other way 
D. financiers should admit that they were wrong in thinking that large deficits will cause higher inflation rates The passage never blames financers for anything. On the contrary, it makes them look like the victims of popular belief. 
E. financiers generally do not think that the author's criticisms of the second argument are worthy of consideration Financers are used as an object in the passage. They never do anything other than make passive judgements based on popular belief

GMATNinja · Answer

Passage breakdown 
In the first paragraph (P1), the author  introduces and supports a conventional view :

This view holds "large deficits in the United States budget cause interest rates to rise". 
 The author provides  two  supporting arguments for this conventional wisdom.

In the second paragraph, the author  explains why the first supporting argument in P1 is unreasonable

In the third paragraph, the author  explains why the second supporting argument in P1 is invalid.

He/she then suggests that educating financiers could help prevent interest rates from rising with budget deficits.

For more on the process of breaking down RC passages, check out  this article  and  our live RC videos .

Explanations for individual questions 
  Question 1
 
  Part 1  
  Part 2    
  Question 2  
  Question 3  
 Question 4
   Part 1  
  Part 2  
  Part 3

adymehta29 · Answer

I think the answer to the Q3 should be E

as the passage suggests that   "there is no reason to expect deficits to cause inflation"  (last para)
and hence we can conclude that US will increase the supply of money, provided that it wont result in inflation

i agree with rest of the answers

correct me if i am wrong

maggie27 · Answer

1. C
2. C
3. E
4. C

Please provide the OA.
Piyush,
What strategy do you suggest for RCs like this in which the content is nothing but a jargon to the reader? This RC mentions some business related stuff, which I was not able to comprehend at all in my first reading(or may be second reading too) so I kinda skipped most of the details and hence took long long time to figure out the answers(most of which might be wrong as well, no wonder!)
Please help . :cry:

WoundedTiger · Answer

1. Which of the following best summarizes the central idea of the passage?
A. A decrease in nongovernment borrowing or an increase in the availability of credit can eliminate or lessen the ill effects of increased borrowing by the government.
B. Educating financiers about the true relationship between large federal deficits and high interest rates will make financiers less prone to raise interest rates in response to deficits.
C. There is little support for the widely held belief that large federal deficits will create higher interest rates, as the main arguments given to defend this claim are flawed.
D. When the government borrows money, demand for credit increases, typically creating higher interest rates unless special conditions such as decreased consumer spending arise.
E. Given that most financiers believe in a cause-and-effect relationship between large deficits and high interest rates, it should be expected that financiers will raise interest rates.

The passage basically talks about what general thinking and the 2 reasons behind that thinking. Thereafter, The authors discusses the problem with those reason in Para 2 and para 3

A,C,E can be ruled out based on Initial reading because

A :It is not discussed here 
C: There is a support but under given set of conditions 
E: Yes, this happens but this is not the Central Idea but rather a point made by the author as to why this happens.
Between B and D ....Again D is more generic and does not cover the whole argument.

B is the winner here. 
 2. It can be inferred from the passage that proponents of the second argument would most likely agree with which of the following statements?
A. The United States government does not usually care whether or not inflation increases.
B. People in the United States government generally know very little about economics.
C. The United States government is sometimes careless in formulating its economic policies.
D. The United States government sometimes relies too much on the easy availability of foreign credit.
E. The United States government increases the money supply whenever there is enough room for growth to support the increase.

A----What is slated in the passage is that  " that the government will tend to finance its deficits by increasing the money supply with insufficient regard for whether there is enough room for economic growth to enable such an increase to occur without causing inflation "....and therefore this can be inferred from the passage.
B. People in USA are not really discussed
C. Again, this is a very big statement to make based on the contents in the passage
D. We don't know on what US govt relies more...So cannot be inferred
E. This what the author says is ideally the case where as the proponents say that US Govt does so without considering whether economic growth is possible or not.

A is the answer here...I chose D initially but realized there are not enough pointers to that

3. Which of the following claims concerning the United States government's financing of the deficit does the author make in discussing the second argument?
A. The government will decrease the money supply in times when the government does not have a deficit to finance.
B. The government finances its deficits by increasing the money supply whenever the economy is expanding.
C. As long as the government finances the deficit by borrowing, nongovernment borrowers will pay higher interest rates.
D. The only way for the government to finance its deficits is to increase the money supply without regard for whether such an increase would cause inflation.
E. Inflation should be caused when the government finances the deficit by increasing the money supply only if there is not enough room for economic growth to support the increase.

It is a direct question and if we go back to the passage(Para 1 last part and Para 3), we can find the answer..E is the winner here

4. The author uses the term "admittedly" (see highlighted text) in order to indicate that
A. the second argument has some truth to it, though not for the reasons usually supposed
B. the author has not been successful in attempting to point out inadequacies in the two arguments
C. the thesis that large deficits directly cause interest rates to rise has strong support after all
D. financiers should admit that they were wrong in thinking that large deficits will cause higher inflation rates
E. financiers generally do not think that the author's criticisms of the second argument are worthy of consideration

A for me.....

PiyushK · Answer

Hi Maggie,

For such RCs one should note down details and flow while reading passage: identify how things are interrelated. This passage is definitely a 700 level 
passage. I would suggest that you read few articles on national budget or foreign trade or cash flow etc, and that you familiarize yourself with terminologies such as deficit. I hope such workout may help you.

Further, GMAT is all about strategy: one should identify one's weaknesses and skip such questions that may waste time. IMO First 10 - any mid 10 - and last 10 questions are important, and skip what you think is going above head. It depends further on what score you want to achieve and what personal strategy you have to beat the algorithm within 75min.

OAs are updated you can match your answers.

Regards,
Piyush

WoundedTiger · Answer

Hi PiyushK,

Agree with C....IN 1ST Question....But how about 2nd Question....I chose A although I think there is enough mention indirectly for the option in A.....
Proponents of the second argument will say.....

Skywalker18 · Answer

Took 10 mins 20 seconds in total , including 3 mins 40 seconds to read

-There are 2 main arguments given for a certain claim - The author clearly explains how both claims can be clearly and easily disproved -He does not provide any support for the 2 widely held beliefs/claims 1. Options A,B,D and E are re instatements of the author’s refute for a certain widely held belief. But only option (C) summarizes the central idea of the passage which is that the widely held beliefs are not supported by the author 2. “The second argument supposes that the government will tend to finance its deficits by increasing the money supply with insufficient regard for whether there is enough room for economic growth to enable such an increase to occur without causing inflation. Answer C 3 . “Financing the deficit by increasing the money supply should cause inflation only when there is not enough room for economic growth" Option (E) is a clear word justification of the above excerpt. 4. “This effect, however, is due to ignorance, not to the deficit itself, and could be lessened by educating financiers on this issue" The above excerpt clearly indicates that the effect of increased interest rates is due to people not being educated and not because of the deficit itself. Hence option (A)

ShashankDave · Answer

GMATNinja 
Please help with Q1.

1. Which of the following best summarizes the central idea of the passage?
A. A decrease in nongovernment borrowing or an increase in the availability of credit can eliminate or lessen the ill effects of increased borrowing by the government.
B. Educating financiers about the true relationship between large federal deficits and high interest rates will make financiers less prone to raise interest rates in response to deficits.
C. There is little support for the widely held belief that large federal deficits will create higher interest rates, as the main arguments given to defend this claim are flawed.
D. When the government borrows money, demand for credit increases, typically creating higher interest rates unless special conditions such as decreased consumer spending arise.
E. Given that most financiers believe in a cause-and-effect relationship between large deficits and high interest rates, it should be expected that financiers will raise interest rates.

I dont understand how C is correct. My problem is the opening words "There is little support for the widely believed.." Little support? from whom? Where did author mention that there is little support?
That's what I don't understand. How can we say that there is little support? We can say for sure that the arguments are questionable..but little support? I often make mistakes in these easy questions..please help

GMATNinja · Answer

Question 1 
 
According to conventional wisdom, large deficits in the United States budget cause interest rates to rise. Two main arguments are given for this claim. The author describes each of these main arguments and explains why they are not valid.

The author then explains another factor that CAN causes interest rates to rise when there is a deficit: "since many financiers believe that deficits ordinarily create inflation, then admittedly they will be inclined to raise interest rates to offset mistakenly anticipated inflation. This effect, however, is due to ignorance, not to the deficit itself, and could be lessened by educating financiers on this issue." In other words, even IF interest rates rise when there is a deficit, the rise is due to ignorance, not the deficit itself.

Do deficits cause interest rates to rise? Sure, there might be some other evidence in support of the conventional wisdom, but the author has seemingly weakened all of the main arguments/evidence. We can infer that this would leave "little support" for the conventional wisdom.

jabhatta2 · Answer

GMATNinja

Followup on this

i) The author has definitely weakened the argument that "Deficits cause inflation" ....

However we do not know how people have reacted to this weakening of the argument put forth by the author in this passage

If only the author believes these weakeners and not anyone else in the public -- how can one conclude that "there is little support for this widely held belief / argument" ... Maybe just the author believe there is little support whereas everyone else in the public believes this widely held view

ii) Is B just too narrow for a central idea ? I selected B because i thought this was accurate as per mentioned in the last line ...B is perhaps a recommendation to the problem / not necessarily the main idea

GMATNinja · Answer

We were not asked about what everyone else in the public believes...

...we're asked which choice best summarizes  the central idea of the passage  (in other words,  the central idea that the author presents in this passage ).

Yep! Too narrow. Now that we're clearer about the exact question that's being asked, let's take another look at (B):

"Main idea" questions require us to understand why the author wrote the passage as a whole. For this reason, answer choices can accurately reflect why the author wrote a particular paragraph, or suggest a likely belief of the author. However, these kinds of choices are still  incorrect answers to the question , which pertains to the entire passage.

That's why we eliminate (B) and keep (C). I hope this helps!

vishuvashishth · Answer

GMATNinja 
Hi GmatNinja,
Could you please explain question 2nd , why option A is wrong ?

As per the line mentioned in first paragraph "The second argument supposes that the government will tend to finance its deficits by increasing the money supply with insufficient regard for whether there is enough room for economic growth to enable such an increase to occur without causing inflation. "

Why can't we infer that "The United States government does not usually care whether or not inflation increases" ?

Why can't we infer that "The United States government does not usually care whether or not inflation increases" ?

jassharminder · Answer

I am unable to solve below mentioned questions. Can anyone help me?

2. It can be inferred from the passage that proponents of the second argument would most likely agree with which of the following statements?

(A) The United States government does not usually care whether or not inflation increases.
(B) People in the United States government generally know very little about economics.
(C) The United States government is sometimes careless in formulating its economic policies.
(D) The United States government sometimes relies too much on the easy availability of foreign credit.
(E) The United States government increases the money supply whenever there is enough room for growth to support the increase

4. The author uses the term "admittedly" (see highlighted text) in order to indicate that

(A) the second argument has some truth to it, though not for the reasons usually supposed
(B) the author has not been successful in attempting to point out inadequacies in the two arguments
(C) the thesis that large deficits directly cause interest rates to rise has strong support after all
(D) financiers should admit that they were wrong in thinking that large deficits will cause higher inflation rates
(E) financiers generally do not think that the author's criticisms of the second argument are worthy of consideration

GMATNinja · Answer

For question 2, please see  this  post and let me know if you have any further questions.

For question 4, here is the sentence that contains the word "admittedly":
 
Let's establish the context of this sentence in the last paragraph of the passage.

The main idea expressed that paragraph is that "the second argument is also problematic." And here is that "second argument" as it is described in the first paragraph:

"The government will tend to finance its deficits by increasing the money supply with insufficient regard for whether there is enough room for economic growth to enable such an increase to occur without causing inflation."  
  "Financiers will expect the deficit to cause inflation and will raise interest rates, anticipating that because of inflation the money they lend will be worth less when paid back."

So, in the last paragraph of the passage the author should support his/her contention that this second argument is "problematic." However, the sentence which contains the word "admittedly" is actually somewhat contrary to the idea that the second argument is problematic.

Take another look at that sentence: "However, since many financiers believe that deficits ordinarily create inflation, then  admittedly  they will be inclined to raise interest rates to offset mistakenly anticipated inflation."

Here, the author  admits  that the financiers will be inclined to raise interest rates if there is a deficit -- just as the "second argument" says. But why are financiers inclined to raise interest rates in that case? In order "to offset  mistakenly  anticipated inflation."

So the author agrees (with the second argument) that an inclination to raise interest rates will follow an increase in the deficit. However, the author believes that the  cause  of this phenomenon is ignorance, not the deficit increase itself: "This effect, however, is due to ignorance, not to the deficit itself."

In short, the author admits that the second argument has some truth but does not agree with the conventional reasoning behind that argument.

This analysis is reflected in answer choice (A):
 
Instead of the "reasons usually supposed," the author attributes the partial truth of the second argument to ignorance. (A) is the correct answer.

I hope that helps!

zoezhuyan · Answer

dear  GMATNinja , i need your help to clarify further about D in Q4.

for me, i think the author uses "admittedly " because he can understand what the proponents of 2nd argument will do if interest rates increase follow deficits. "admittedly " shows author's understand, based on the problematic believe of proponents of 2nd argument is problematic. so I think author intends to point out the flaw.

that's why I choose D.

please help.

Debo1988 · Answer

GMATNinja

Firstly, I want to thank and congratulate you for your recently concluded super awesome RC series.
Here's the link for the first (of four) in the series for those who are struggling with RC or are good but aiming for an elite score.
I highly recommend this series as I am already noting improvements in RC.
https://www.youtube.com/watch?v=hXWVCiy1WU0

Coming to this passage. My query is regarding the correct option for question #3.
E. Inflation should be caused when the government finances the deficit by increasing the money supply only if there is not enough room for economic growth to support the increase.
Isn't "only if" a bit too strong for a correct answer? How do we know from the passage that there aren't other factors that could cause inflation when government finances the deficit by increasing the money supply?

Cheers!
Debo

GMATNinja · Answer

Thanks you so much for your kind words about the RC series!

To answer your question: yes, the  only if  DOES make this a strong claim! Let's look at the passage to see whether the author really does make such a bold statement.

The relevant part of the passage is near the start of the second paragraph:
 
And here's (E) so we can see them side by side:
 
From this, we can see that (E) is a rewording of the claim made in the passage. The  only if  in (E) is exchanged for  only when  in the passage. Since (E) is a rewording of the claim made in the passage, we can't say the  only if  in (E) is too strong for a correct answer.

(E) is the same claim that the author makes in the passage -- this is why (E) is the answer to this question.

I hope that helps!

Conventional wisdom has it that large deficits in the United States bu

Prep Toolkit

Top 5 GMAT Debrief Videos

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards

GMAT Reading Comprehension (RC) Questions

Conventional wisdom has it that large deficits in the United States bu

Prep Toolkit

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards