During the recent economic downturn, banks contributed to the decline by loaning less money. Prior to the downturn, regulatory standards for making bank loans were tightened. Clearly, therefore, banks will lend more money if those standards are relaxed.

The argument assumes that...

A. The downturn did not cause a significant decrease in the total amount of money on deposit with banks, which is the source of funds for banks to lend.

B. The imposition of the tighter regulatory standards was not a cause of the economic downturn.

C. The reason for tightening the regulatory standards was not arbitrary.

D. No economic downturn is accompanied by a significant decrease in the amount of money loaned out by banks to individual borrowers and to businesses.

E. No relaxation of standards for bank loans would compensate for the effects of the downturn

The argument is forward looking.

Regulatory standards for loans were tightened.
So during the recession, banks contributed to the decline by loaning less money.

Conclusion: If the standards are relaxed, the banks will loan more money (implying that it might help negate the effects of economic downturn)

We are looking for an assumption.

A. The downturn did not cause a significant decrease in the total amount of money on deposit with banks, which is the source of funds for banks to lend.

Correct. The conclusion is saying that if the standards are relaxed, the banks will loan more money. But do the banks have money to loan? The conclusion is assuming that they do. So the conclusion is assuming that the downturn did not cause significant decrease in the total amount of money on deposit with banks.

B. The imposition of the tighter regulatory standards was not a cause of the economic downturn.

Not an assumption. The argument says that the banks "contributed" to the decline. So the tighter standards was a contributing factor. In what way it contributed, we do not know. Hence it does not assume that the tighter standards was not a cause - whether it triggered the downturn along with some other factors and some additional factors worsened the downturn or some other factors triggered it and the standards worsened the downturn.

C. The reason for tightening the regulatory standards was not arbitrary.

Irrelevant.

D. No economic downturn is accompanied by a significant decrease in the amount of money loaned out by banks to individual borrowers and to businesses.

Let's negate it: Some downturns are accompanied by banks loaning less money.
Our conclusion can still hold. We don't know what happened in this particular downturn. Did the downturn cause banks to loan less money? We don't know. It is quite possible that the tighter standards caused banks to loan less money and once we relax the standards, the banks will loan out more.

E. No relaxation of standards for bank loans would compensate for the effects of the downturn

Not an assumption. If anything, the argument seems to imply that banks will lend more money and that might be helpful to the economy.

Answer (A)

Dear Karishma,

I'm still a bit unsure of my understanding of the stimulus.
Here, the premise is about the past event DURING the decline, but the conclusion is about the future event AFTER the decline right?