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# Is it possible to decrease inflation without causing a

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Is it possible to decrease inflation without causing a [#permalink]

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03 Jan 2011, 01:50
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Is it possible to decrease inflation without causing a recession
and its concomitant increase in unemployment? The orthodox answer is “no.” whether
they support the “inertia” theory of inflation (that today’s inflation rate is caused
by yesterday’s inflation, the state of the economic cycle, and external influences
such as import prices) or the “rational expectations” theory (that inflation is
caused by workers’ and employers’ expec- tations, coupled with a lack of credible
monetary and fiscal policies), most economists agree that tight monetary and
fiscal policies, which cause recessions, are necessary to decelerate
inflation. They point out that in the 1980’s, many European countries and the
United States conquered high (by these countries’ standards) inflation, but only
by applying tight monetary and fiscal policies that sharply increased
unemployment. Nevertheless, some governments’ policymakers insist that direct
controls on wages and prices, without tight monetary and fiscal policies, can
succeed in decreasing inflation. Unfortunately, because this approach fails to
deal with the underlying causes of inflation, wage and price controls eventually
collapse, the hitherto-repressed inflation resurfaces, and in the meantime,
though the policymakers succeed in avoiding a recession, a frozen structure of
relative prices imposes distortions that do damage to the economy’s prospects
for long-term growth.

Which of the following, if true, would most strengthen the author’s conclusion about the use of wage and price controls?
A) Countries that repeatedly use wage and price controls tend to have lower long-term economic growth rates than do other countries.
B) Countries that have extremely high inflation frequently place very stringent controls on wages and prices in an attempt to decrease the inflation.
C) Some countries have found that the use of wage and price controls succeeds in decreasing inflation but also causes a recession.
D) Policymakers who advocate the use of wage and price controls believe that these controls will deal with the underlying causes of inflation.
E) Policymakers who advocate the use of wage and price controls are usually more concerned about long-term economic goals than about short-term economic goals.

The passage suggests that the high inflation in the United States and many European countries in the 1980’s differed from inflation elsewhere in which of the following ways?
A) It fit the rational expectations theory of inflation but not the inertia theory of inflation.
B) It was possible to control without causing a recession.
C) It was easier to control in those countries by applying tight monetary and fiscal policies than it would have been elsewhere.
D) It was not caused by workers’ and employers’ expectations.
E) It would not necessarily be considered high elsewhere.

The primary purpose of the passage is to
A) apply two conventional theories.
B) examine a generally accepted position
C) support a controversial policy
D) explain the underlying causes of a phenomenon
E) propose an innovative solution
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Re: Is it possible to decrease inflation without causing a reces [#permalink]

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03 Jan 2011, 01:51

can some one explain 2 q

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Re: Is it possible to decrease inflation without causing a reces [#permalink]

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04 Jan 2011, 02:15
AEB in 5 mins
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Re: Is it possible to decrease inflation without causing a reces [#permalink]

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04 Jan 2011, 14:30
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2) European countries and the United States conquered high (by these countries’ standards) inflation, but only by applying tight monetary and fiscal policies that sharply increased
unemployment.
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Re: Is it possible to decrease inflation without causing a reces [#permalink]

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10 Jan 2011, 16:14
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The author's "conclusion about the use of wage and price controls" is that they don't really work and cause serious damage: "wage and price controls eventually
collapse, the hitherto-repressed inflation resurfaces, and in the meantime,
... a frozen structure of
relative prices imposes distortions that do damage to the economy’s prospects
for long-term growth."

(A) strengthens this by giving evidence that, in fact, countries that have used wage and price inflation in the past have experienced problems with long-term growth.

(D) concurs with the author's initial evidence, that wage and price controls are intended to deal with inflation, but ignores the conclusion, namely that, according to this author, they fail to successfully do so.
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Re: Is it possible to decrease inflation without causing a reces [#permalink]

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04 Apr 2011, 07:32
@anilnandyala, I think the answer to 2nd question is E. This is mentioned here as well.

short-but-difficult-rc-collection-87981.html
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Re: Is it possible to decrease inflation without causing a [#permalink]

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21 May 2013, 17:05
Q: The passage suggests that the high inflation in the United States and many European countries in the 1980’s differed from inflation elsewhere in which of the following ways?
"
Anybody know why the answer to the 2nd question is E? -- "It would not necessarily be considered high elsewhere"

seems to me it should be B -- "It was possible to control without causing a recession"
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Re: Is it possible to decrease inflation without causing a [#permalink]

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27 May 2013, 09:36
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Hi,

It is E because of this phrase:

by these countries’ standards

This is pretty conclusive.

I agree that there is some temptation over E. As the passage never explicitly states that USA/Europe went into recession. However it does imply that they dented their inflation by employing policies that cause recessions. So this is less clear than B and so not correct.

Does that make sense?

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Re: Is it possible to decrease inflation without causing a [#permalink]

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23 Oct 2013, 04:12
OA for the passage

1.A
2.E
3.B
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Re: Is it possible to decrease inflation without causing a [#permalink]

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16 Dec 2013, 08:10
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1. Conclusion - The author thinks that wage and price controls damage economy's prospects for long-term growth.
A - Correct (Seems best of all)
B - Irrelevant to the conclusion
C - Weakens, as the author says it helps to avoid recession
D - Weaken, as the author says they do not deal with underlying causes of inflation
E - Weaken, because if the policy makers thought about long term economic goals, they would have not used wage and price controls.

2. "They point out that in the 1980's, many European countries and the United States conquered high (by these countries' standards)"
A - Incorrect
B - Incorrect
C - Incorrect
D - Incorrect
E - Correct

3. The primary purpose of the passage is to

Main Idea (1st two lines):
It is actually not possible to decrease inflation without causing a recession and a corresponding increase in unemployment
Some keywords which point this out: Orthodox, most economists

Mapping:
Majority agree that tight monetary and fiscal policies reqd --> to reduce Inflation
(they might be supporting I-Theory or R-Theory BUT in the end agree on the above point)

US/Europe example provided to strengthen the above.

Some say that controls on wages and prices can decrease inflation without causing a recession (and dont support tight monetary and fiscal policies) --> This approach fails due to the reasons provided in the last line.

A - apply two conventional theories.
Although 2 theories are mentioned (Inertia, Rational), they are not main point of the entire passage. The author only uses these theory to say something about the economists (economist support either of the two viewpoints)
B - examine a generally accepted position
This is not directly stated but if you consider the Big Picture this is indeed the answer. The word orthodox (conventional, generally accepted beliefs) signals this.
C - support a controversial policy
The author mentions a policy to which most economist agree (1st half), so there is no controversy as such
D - explain the underlying causes of a phenomenon
The author is not giving his viewpoints and justifying/detailing them. He is just presenting some facts and viewpoints of the economists.
E - propose an innovative solution
There is no innovation as such.
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Re: Is it possible to decrease inflation without causing a [#permalink]

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13 Jan 2014, 02:31
Hi,

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Re: Is it possible to decrease inflation without causing a [#permalink]

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25 Feb 2015, 10:28
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Re: Is it possible to decrease inflation without causing a [#permalink]

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02 Apr 2016, 11:38
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Re: Is it possible to decrease inflation without causing a [#permalink]

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03 Dec 2016, 09:02
The reason why Q2 is E is as follows:
"...conquered high (by these countries' standards) inflation..." means that USA and Europe had high inflation according to their own standard. The primary reason why the comment in the parenthesis is mentioned is to compare the rates with those of other countries, where inflation rates maybe so high that these other countries don't find USA's and Europe's rate to be that high.

By USA's and Europe's own standards, the inflation maybe high, but by others' standard, it might be low. That's the only logical explanation for having the comment in the parenthesis included in the passage in the first place.

Hope it helps
Re: Is it possible to decrease inflation without causing a   [#permalink] 03 Dec 2016, 09:02
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