In all industrial countries, the seventies were a time of slowdown

Question

In all industrial countries, the seventies were a time of slowdown in real economic growth. In some countries, people resisted the decline in real income growth and tried to maintain their accustomed growth in living standards by demanding higher wages and salaries. In other countries, where there was a higher degree of ‘social consensus’, it was recognized that such a wage-price spiral would be damaging to the society as a whole, and people accepted the lower real income growth without demanding a pushing up of wages and prices. In testing this hypothesis, researchers examined the experience of eighteen industrial countries in the seventies. It was seen that the differences in the inflation performances of these countries were well-explained by the indicator representing the degrees of social consciousness.

Two rationales are advanced for the role of social consensus. The first is based on conflict over the distribution of a known loss in aggregate real income, while the second is based on imperfect information regarding the size of the loss. The two rationales are not mutually exclusive, but the first represents a greater departure from economic orthodoxy than the second. Let us first suppose that there is a big increase in the price of imported oil and that the size of the resulting loss of aggregate real income is known to all. In countries having a high degree of consensus, each group of individuals may be willing to scale down its claim on output in the same proportion as the aggregate reduction. On the other hand, in countries lacking such consensus, there may be an unwillingness to scale down demands. In the latter case, inflationary pressures will emerge even though the process is ultimately likely to be counterproductive or irrational from the point of view of the society as a whole.

According to the second rationale, workers demand no more than what is warranted by productivity, and if they know that productivity has fallen or oil prices have increased, they are willing to accept a lower wage. However, workers will not generally have enough information to know the value of their contribution to production, and they will not necessarily believe statements by the firm that productivity growth has declined. They will not be certain whether such statements are true or whether these statements represent attempts by the firm to cheat them. Statements by the firms will have greater credibility where the firms have established a reputation for fairness than where there is a high degree of mistrust between workers and employers. The greater the degree of trust, the less will be the workers’ resistance to reduction in the level or growth rate of real wage.

Both rationales suggest that real wages may be relatively inflexible, at least in downward direction, when there is a lack of social consensus.

Source: Controlling Inflation: Learning from Experience in Canada, Europe and Japan – Clarence Barber, John McCallum    
 1 
 D 
 1. Which of the following can be concluded from the information given in the passage?

A. Economic slowdown causes inflation.
B. Unwillingness to scale down demands in the event of a known loss in aggregate real income prevents social consensus.
C. People's acceptance of lower real income growth can prevent inflation.
D. Reliable indicators of social consciousness exist.
E. Workers are generally resistant to reduction in the level or growth rate of real wage.

2 
 D 
 2. Which one of the following will most strengthen the author's viewpoint that lack of social consensus makes wages inflexible?

A. An agreement among workers that wage-price spiral is damaging to society as a whole.
B. A report that concludes that the high inflation in a given country is a result of its workers' unwillingness to accept lower wages.
C. Empirical evidence that the greater the mistrust between workers and employers, the more the inflation in the country.
D. A news report that a workers' union refused a wage-reducing proposal by its management.
E. A research indicating that inflationary pressures are likely to be counterproductive for a nation's economy.

3 
 E 
 3. The authors believe which of the following regarding the two rationales advanced for the role of social consensus?

I. Both the rationales challenge traditional economics.
II. Both the rationales explain the role of social consensus in inflation performance.
III. The rationales can co-exist.

A. I only
B. II only
C. II and III only
D. I and II only
E. I, II, and III

KanakGarg · Accepted Answer

Let me just add my 2 cents on 3rd Q.
From the line mentioned below it is clear that both rationales challenged the traditional one while the magnitude of difference was more in first one. 
"The two rationales are not mutually exclusive, but the first represents a  greater  departure from economic orthodoxy than the second"

Hope it helps!

deepshikha12 · Answer

1. Which of the following can be concluded from the information given in the passage?

A. Economic slowdown causes inflation. - not mentioned in para. 
B. Unwillingness to scale down demands in the event of a known loss in aggregate real income prevents social consensus. - prevention technique not given
C. People's acceptance of lower real income growth can prevent inflation. - not given in para. 
D. Reliable indicators of social consciousness exist. - consensus can vary, but indicators such as oil price increase exists. so ok, kinda make sense 
E. Workers are generally resistant to reduction in the level or growth rate of real wage. - "Generally" is a problematic word. nowhere it is given that it is common. in-fact two different theories are given to provide varied scenarios .

2. Which one of the following will most strengthen the author's viewpoint that lack of social consensus makes wages inflexible?

As per the 3rd para, the lack of social consensus occurs due to mistrust in the management. so anything that management does is not reliable but any other source may/ may not be of any judgement. So any option other than reliable sources, shall be supporting the idea.

A. An agreement among workers that wage-price spiral is damaging to society as a whole. - mentioned in 1st para, not relevant 
B. A report that concludes that the high inflation in a given country is a result of its workers' unwillingness to accept lower wages. - not relevant, its about mgmt and not about evidence/ research/ reports.
C. Empirical evidence that the greater the mistrust between workers and employers, the more the inflation in the country.- not relevant, its about mgmt and not about evidence/ research/ reports.
D. A news report that a workers' union refused a wage-reducing proposal by its management. - yes, because it shows that worker do not blv in management 
E. A research indicating that inflationary pressures are likely to be counterproductive for a nation's economy. - not relevant, its about mgmt and not about evidence/ research/ reports.

The authors believe which of the following regarding the two rationales advanced for the role of social consensus?

I. Both the rationales challenge traditional economics.- both are hypothesis to test against traditional view. 
II. Both the rationales explain the role of social consensus in inflation performance. - yes, last line of para 2 and 3 concludes the role of social consensus and inflation impact
III. The rationales can co-exist. - can be inferred as different nature of different countries mentioned in para 1 (some countries resisted, some agreed) .

Bigpic · Answer

Good post. Few additional viewpoints.

1. Option C is a trap. It would have been a strong contender if it were to be worded as "People's acceptance of lower real income growth can prevent inflation during a time of slowdown in real economic growth". Option C as such is general statement and may not be applicable during strong economic growth. Thus the closest contender is Option D.

2. The relevant passage talks about social consensus, trust/mistrust between the management and wages of workers. Only Option C and D is about mistrust. Option C is wrong because nothing is said about inflation in the relevant passage. The overtly obvious "mistrust" works as a trap. Option D correctly implies "mistrust". The news report clearly implies "mistrust" because according to the passage, the workers won't accept wage reduction if they don't trust the management. The news report is a proof of the assertion made in the passage and hence strengthens it.

3. II and III can be easily inferred. I is tricky but the explanation by  KanakGarg  is very apt in justifying it.
"The two rationales are not mutually exclusive, but the first represents a greater departure from economic orthodoxy than the second"

dragonz91 · Answer

Sajjad1994   VeritasKarishma  Please share you comments on Q1,Q2.

Q1: I feel both C and D are true. C is true because, it is clearly mentioned in para2 that if there is consensus -> people accept lower wage -> potential inflation (arising out of non acceptance) prevented. So C "can prevent" seems also to be true.
Option D: is also true . as it's an assumption required for "It was seen that the differences in the inflation performances of these countries were well-explained by the indicator representing the degrees of social consciousness."

Q2: the author is primarily trying to prove the link between social consensus and flexibility of wages (inferred from last line of the passage and also the first para: "In testing this hypothesis, researchers examined the experience of eighteen industrial countries in the seventies"), and he gives two "ROLES" which point toward this correlation. So, Option C, which connects the link(between consensus and wage flexibilty) by showing empirical evidence to strengthen ROLE 2, seems to be the correct option.

KarishmaB · Answer

I had a tough time with this passage and I will tell you why:

1. It talks about ‘social consensus’ everywhere which sounds like there is majority opinion. That everyone thinks in the same way. 
2. In the last sentence of first paragraph, it takes about:
It was seen that the differences in the inflation performances of these countries were well-explained by the indicator representing the degrees of  social consciousness .

Now social consciousness is social awareness. It is not the same as social consensus. So what is the actual link? It does make sense that social consciousness is the link but the passage talks a lot about social consensus. What if there is a high degree of social consensus but everyone feels that they should not be taking a wage cut? Then it will lead to high inflation. High degree of social consciousness will make people readily take a cut if circumstances require. Hence the confusion.

Question 1 is fine because the only thing I can conclude is (D).

1. Which of the following can be concluded from the information given in the passage?

A. Economic slowdown causes inflation.
B. Unwillingness to scale down demands in the event of a known loss in aggregate real income prevents social consensus.
C. People's acceptance of lower real income growth can prevent inflation.
D. Reliable indicators of social consciousness exist.
E. Workers are generally resistant to reduction in the level or growth rate of real wage.

We are only talking about degrees of inflation. Is there any way to "prevent" inflation, we can't say. So (C) cannot be concluded.

As for question (2), it talks about social consensus. Since the terminology and what they mean by it was not clear, I will leave this question and move on.

sriramsundaram91 · Answer

1. Which of the following can be concluded from the information given in the passage?
A. Economic slowdown causes inflation.
B. Unwillingness to scale down demands in the event of a known loss in aggregate real income prevents social consensus.
C. People's acceptance of lower real income growth can prevent inflation.
D. Reliable indicators of social consciousness exist.
E. Workers are generally resistant to reduction in the level or growth rate of real wage.

Eliminating A is very easy as it is not mentioned in the Paragraph.
B. Unwillingness to scale down demands in the event of a known loss in aggregate real income prevents social consensus. - One has to be careful eliminating this because there is a mention of it in the given passage.
In fact, the passage states - " On the other hand, in countries lacking such consensus, there may be an unwillingness to scale down demands". This clearly means that lack of consensus causes unwillingness to scale down demands and not the other way around, So this is eliminated.
C. People's acceptance of lower real income growth can prevent inflation. Eliminated because - The two rationales are not mutually exclusive, but the first represents a greater departure from economic orthodoxy than the second. Therefore both lead to economic orthodoxy i.e. inflation.
E. Workers are generally resistant to reduction in the level or growth rate of real wage. This is eliminated because passage says that some workers accept a lesser wage when they are conscious of the fact that the economy is not doing great.

D. Reliable indicators of social consciousness exist. -- This is indirectly mentioned in the passage -- Read the last two lines of the passage - "Both rationales suggest that real wages may be relatively inflexible, at least in downward direction, when there is a lack of social consensus" This means that when the wages are relatively inflexible in the market and the market is in downward direction, it must indicate lack of social consciousness , thereby we can reliably assume that there is lack of social consensus therefore we are a reliable indicator of social consciousness.

vishal222 · Answer

Can someone please explain question 2.

Sajjad1994 · Answer

This question seems to have double answers in B and D. Its better not to bother for it.

Thank you!

Ridss · Answer

Here is my understanding of Q3

I. Both the rationales challenge traditional economics.
This can be infered from the line
The two rationales are not mutually exclusive, but the first represents a greater departure from economic orthodoxy than the second. in para2.
1st has greater departure than 2nd means that both might challenge the traditional economics , however 1st challenges it more hence I is correct

II. Both the rationales explain the role of social consensus in inflation performance. -> the explanation of the rationales and para 2 - 3 explain the same

III. The rationales can co-exist.
...The two rationales are not mutually exclusive,... implies that they can co-exist. Hence all three are correct

VerbalBot · Answer

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In all industrial countries, the seventies were a time of slowdown

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In all industrial countries, the seventies were a time of slowdown

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