In the recent past, few central banks would have placed heavy emphasis

Question

In the recent past, few central banks would have placed heavy emphasis on maximizing public understanding. Moreover, there is no general presumption that increasing common knowledge in society improves welfare. The transparency literature is rife with examples where this is not the case, for example, Faust and Svensson.

Indeed, much of the transparency literature can be viewed as a study of when it is and is not optimal for the central bank to surprise the public deliberately. This conventional transparency literature does not address three arguments in favor of clear communication that are stressed by ITF advocates and many other commentators.

First, as Greenspan states, "Openness is an obligation of a central bank in a free and democratic society." A great many conservative and liberal economists have supported this view. Deliberately surprising the public, even for its own good, is not the proper role of a central bank, in this view.

The second reason for clarity is that, as Lucas makes clear, what constitutes optimal policy is inextricably linked with public expectations about policy. The effects of a given policy action are not even de¦ned without a treatment of policy expectations. More recently, discussions of the liquidity trap have reminded us of this point. The liquidity trap case drives the point home because, under certain assumptions, expanding the monetary base in a liquidity trap has no direct effects on the economy. Any effects result from changes in expectations.

Lucas argues that, even away from the liquidity trap, both the agent's problem and the central bank's problem in practice are intractable unless the public understands what the central bank is doing. An assumption about public understanding of the future course of policy is a precondition for coherent analysis of current policy.

The third argument in favor of clear communication is that it may alter incentives in a beneficial way. Many variations of this idea have been studied in the political economy literature.    1 
 1. The author would most likely agree with all of the following statements EXCEPT:

A. transparency literature discusses the impact of intentionally suppressing policy decisions 
B. there are secondary bene¦ts to an open and public fiscal policy
C. optimal fiscal policy is tied to public expectations
D. a liquidity trap has no direct effect on the economy
E. central banks future in democratic societies should publicize their current and future fiscal policies

2 
 2. According to the passage, Faust and Scensson would most likely agree with which of the following statements?

A. Clear communication is a key to altering incentives in bene¦cial ways
B. Public expectations should be taken into account when setting fiscal policy
C. The liquidity trap is invalid in current economic thinking
D. There are many circumstances where it is appropriate for central banks to obscure their activities
E. Conventional transparency literature is no longer valid in modern economic planning

3 
 3. The main concern of the passage is to

A. advocate particular strategies for future central bank policy
B. argue the validity of a departure from the conventional wisdom of the past
C. explain differences in the function of transparency literature
D. analyze and explain a political phenomenon
E. evaluate the effectiveness of certain kinds economic policy

4 
 4. In the third paragraph, the author uses a quote by Greenspan to:

A. express a common view
B. detail a fiscal policy
C. describe the impact of a decision
D. reinforce a previous declaration
E. offer an explanation of a specific phenomenon

Source: CAT Prep GMAT/Manhattan Review

Sajjad1994 · Answer

Explanation

3. The main concern of the passage is to

Difficulty Level:   700

Explanation

The correct answer is  (B)

(A)  The passage does discuss strategies related to central bank communication, but it does not explicitly advocate for any specific strategies. It presents arguments for and against clear communication but does not promote a particular strategy.

(C)  This option is partially correct in that the passage does explain differences in the function of transparency literature, but it goes beyond just explaining differences. The passage also presents arguments for and against clear communication by central banks, making (B) a more accurate representation of its main concern.

(D)  The passage primarily deals with the concept of transparency in central banking and the arguments surrounding it, rather than analyzing and explaining a political phenomenon. While it mentions the views of various economists and central bankers, it does not focus on a broader political phenomenon.

(E)  The passage does touch upon the effectiveness of clear communication by central banks, but this is not its primary focus. It discusses the arguments for clear communication more than it evaluates their effectiveness in terms of economic policy.

In contrast,  (B)  accurately captures the main concern of the passage, which is to discuss and argue for a departure from conventional wisdom regarding central bank transparency. The passage highlights that the traditional views on central bank transparency may not be valid in the modern context and presents reasons for this departure from conventional wisdom.

Answer: B

Sajjad1994 · Answer

Explanation

1. The author would most likely agree with all of the following statements EXCEPT:

Explanation

The author would most likely disagree with option D. The passage suggests that, under certain assumptions, expanding the monetary base in a liquidity trap has no direct effects on the economy. This means that, contrary to option D, the liquidity trap does have indirect effects on the economy through changes in expectations. Lucas argues that understanding public expectations about policy is crucial for defining optimal policy, and this understanding is necessary for coherent analysis of current policy, even away from the liquidity trap.

A.  The passage discusses the impact of intentionally suppressing policy decisions as part of the transparency literature, so the author would likely agree with this statement.

B.  The passage does mention secondary benefits to an open and public fiscal policy, supporting the idea that transparency can have positive effects, so the author would likely agree with this statement.

C.  The passage emphasizes that what constitutes optimal policy is linked with public expectations about policy, so the author would likely agree with this statement.

D.   The passage suggests that, under certain assumptions, expanding the monetary base in a liquidity trap has no direct effects on the economy. However, the passage acknowledges that any effects result from changes in expectations, indicating that there are indirect effects. Therefore, the author would likely disagree with D.

E.  The passage supports the idea that openness is an obligation of a central bank in a free and democratic society, advocating for clear communication of fiscal policies. Therefore, the author would likely agree with E.

Answer: D

Sajjad1994 · Answer

Explanation

4. In the third paragraph, the author uses a quote by Greenspan to:

Explanation

A.   This option suggests that the quote by Greenspan is used to articulate a widely held perspective among economists and commentators. It implies that many people in the field share the belief that openness and transparency are fundamental responsibilities of central banks in a democratic society. The passage indeed supports this idea by stating that  "a great many conservative and liberal economists have supported this view."

B.  This option implies that the quote provides specific information about a fiscal policy. However, the quote by Greenspan does not pertain to fiscal policy but rather to the conduct and obligations of central banks in terms of transparency and openness.

C.  This option suggests that the quote is used to describe the consequences or effects of a particular decision. While Greenspan's statement does touch upon the impact of central bank behavior on society, it primarily emphasizes the principle of openness and transparency rather than detailing the consequences of a specific decision.

D.  This option implies that the quote serves to strengthen or support a statement made earlier in the passage. Indeed, the passage discusses the importance of clear communication by central banks, and Greenspan's quote aligns with this broader argument, reinforcing the idea that transparency is essential.

E.  This option suggests that the quote provides insight or clarification regarding a particular phenomenon discussed in the passage. However, Greenspan's statement primarily addresses the broader principle of central bank transparency and its importance in a democratic society, rather than explaining a specific phenomenon.

Answer: A

Sajjad1994 · Answer

Explanation

2. According to the passage, Faust and Scensson would most likely agree with which of the following statements?

Explanation

A.  While the passage does argue in favor of clear communication, it primarily emphasizes the importance of clear communication for public understanding, democratic accountability, and shaping policy expectations. Faust and Svensson's work is mentioned in the context of examples where deliberate surprises by central banks might be beneficial. Therefore, while they might agree with the benefits of clear communication, it's not the focus of their work as discussed in the passage.

B.  The passage primarily discusses the relevance of public expectations to monetary policy rather than fiscal policy. While it's true that public expectations are important in economic policy, the passage doesn't specifically mention Faust and Svensson's views on fiscal policy. Therefore, there's no direct support for this statement in relation to their work.

C.  The passage mentions the liquidity trap and its relevance to policy expectations. However, it does not suggest that the liquidity trap is invalid in current economic thinking. Instead, it emphasizes the importance of considering policy expectations, especially in scenarios like the liquidity trap. There's no indication that Faust and Svensson would agree that the liquidity trap is invalid.

D.   This statement aligns with the discussion in the passage about examples from the transparency literature where deliberate surprises by central banks might be beneficial. Faust and Svensson's work is cited in this context, indicating that they would likely agree that there are circumstances where obscuring central bank activities could be appropriate, contrary to conventional views on transparency.

E.  The passage discusses the conventional transparency literature and contrasts it with arguments in favor of clear communication. However, it does not suggest that the conventional transparency literature is no longer valid. Faust and Svensson's work is discussed in relation to examples from this literature, indicating that it's still relevant. Therefore, there's no support for the idea that conventional transparency literature is no longer valid.

Answer: D

rmahe11 · Answer

I feel all the questions in the passage are not framed properly plus it needs better questions

Nidhibatra · Answer

Can someone explain the meaning of this RC. The first two paras are not clear

Posted from my mobile device

Sajjad1994 · Answer

The first two paragraphs suggests that historically, central banks haven't prioritized maximizing public understanding, and there's debate over whether increasing common knowledge always benefits welfare. It also highlights the focus of the transparency literature on when deliberate surprises by central banks are optimal, overlooking arguments for clear communication emphasized by ITF advocates and others.

In the recent past, few central banks would have placed heavy emphasis

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GMAT Reading Comprehension (RC) Questions

In the recent past, few central banks would have placed heavy emphasis

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