Forum Home > GMAT > Quantitative > Problem Solving (PS)
Events & Promotions
GMAT Club Daily Prep
Thank you for using the timer - this advanced tool can estimate your performance and suggest more practice questions. We have subscribed you to Daily Prep Questions via email.
Customized
for You
Track
Your Progress
Practice
Pays
Not interested in getting valuable practice questions and articles delivered to your email? No problem, unsubscribe here.
Sep 1310:00 AM EDT
-11:00 AM EDT
More and more TTP students are earning impressive scores on the GMAT. Now is the perfect time to join the many GMAT students who made the switch to TTP and surpassed their wildest expectations on test day.
Sep 0810:00 AM PDT
-11:00 AM PDT
Paid vs Free GMAT Resources: "What's Best for You?" This concise guide breaks down the pros and cons of both free and paid study materials, helping you make an informed decision for your GMAT journey.
Sep 1211:00 AM EDT
-12:00 PM EDT
Have you ever wondered how to score a PERFECT 805 on the GMAT? Meet Julia, a banking professional who used the Target Test Prep course to achieve this incredible feat. Julia's story is nothing short of an inspiration.
Sep 1201:30 PM IST
-11:30 PM IST
With brand new features like:AI-driven Planner tool, 850+ data Insights practice questions and GMAT Focus Edition Adaptive mock tests with ESR+ analysis and personal mentor support, our course is the most comprehensive course for GMAT Focus Edition.- Sep 14
11:00 AM IST
-01:00 PM IST
Text – Do RC/MSR passages scare you? e-GMAT is conducting a masterclass to help you learn – Learn effective reading strategies, Tackle difficult RC & MSR with confidence, Excel in timed test environment
Conventional wisdom has it that large deficits in the United States bu
[#permalink]
Updated on: 03 Aug 2019, 03:50
Updated on: 03 Aug 2019, 03:50
13
Kudos
80
Bookmarks
Question 1
00:00
A
B
C
D
E
Difficulty:
25%
(medium)
based on 2603 sessions
75% (03:19) correct
25%
(03:15) wrong
Question 2
00:00
A
B
C
D
E
Difficulty:
95%
(hard)
based on 2837 sessions
32% (01:33) correct 68%
(01:32) wrong
Question 3
00:00
A
B
C
D
E
Difficulty:
15%
(low)
based on 2759 sessions
80% (01:26) correct 20%
(01:32) wrong
Question 4
00:00
A
B
C
D
E
Difficulty:
75%
(hard)
based on 2616 sessions
46% (01:15) correct 54%
(01:24) wrong NEW PROJECT!: Back to basic => Give your explanation- Get Kudos Point for best explanation
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.
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. 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. 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. 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. 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) 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. 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. 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. 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
Originally posted by PiyushK on 12 Aug 2014, 07:54.
Last edited by Sajjad1994 on 03 Aug 2019, 03:50, edited 6 times in total.
Last edited by Sajjad1994 on 03 Aug 2019, 03:50, edited 6 times in total.
Updated complete topic (56).
Re: Conventional wisdom has it that large deficits in the United States bu
[#permalink]
19 Aug 2014, 06:44
19 Aug 2014, 06:44
17
Kudos
3
Bookmarks
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 supposedYes. 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 argumentsNothing in the passage to believe this
C. the thesis that large deficits directly cause interest rates to rise has strong support after allOn 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 ratesThe 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 considerationFinancers are used as an object in the passage. They never do anything other than make passive judgements based on popular belief
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 supposedYes. 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 argumentsNothing in the passage to believe this
C. the thesis that large deficits directly cause interest rates to rise has strong support after allOn 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 ratesThe 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 considerationFinancers are used as an object in the passage. They never do anything other than make passive judgements based on popular belief
Re: Conventional wisdom has it that large deficits in the United States bu
[#permalink]
18 Dec 2018, 19:34
18 Dec 2018, 19:34
10
Kudos
8
Bookmarks
Expert Reply
vishuvashishth
GMATNinja
Hi GmatNinja,
Could you please explain question 2nd , why option A is wrong ?
Let's pull this out of the weeds of macroeconomic policy for a minute. Here's a less jargony example:Hi GmatNinja,
Could you please explain question 2nd , why option A is wrong ?
- "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:
vishuvashishth
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" ?
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?Why can't we infer that "The United States government does not usually care 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):
Quote:
(C) The United States government is sometimes careless in formulating its economic policies.
I hope this helps! 
