Is it possible to decrease inflation without causing a recession and

Question

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’ expectations, 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.   1 
 1. 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.

2 
 2. 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.

3 
 3. 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

sahilchaudhary · Accepted Answer

Please find my answer explanations below:

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.

anairamitch1804 · Answer

1)E) It would not necessarily be considered high elsewhere.
>>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.
2)>>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.
(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.
3)Focus on portions that express an OPINION. 
Is it possible to decrease inflation without causing a recession and its concomitant increase in unemployment? 
THE ORTHODOX ANSWER is "no." 
MOST ECONOMISTS AGREE that tight monetary and fiscal policies, which cause recessions, are necessary to 
decelerate inflation. 
THEY POINT OUT that many European countries and the United States conquered inflation by applying policies that sharply increased unemployment. 
Nevertheless, POLICYMAKERS INSIST that direct controls can succeed in decreasing inflation. 
Unfortunately, because THIS APPROACH FAILS TO DEAL with the underlying causes of inflation, a frozen structure imposes distortions that do damage to the economy's prospects for longterm growth. 
The portions above all serve to assess the ORTHODOX view that it is not possible to decrease inflation without causing a recession. 
Thus, the correct answer is B: 
The primary purpose is to examine a generally accepted position. 
The correct answer is B.

AdamKnewton · Answer

2. Which of the following, if true, would most strengthen the author’s conclusion about the use of wage and price controls?

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.

JarvisR · Answer

Time taken:7:17 mins..

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.
>>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. 
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.
>>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.
 
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

patto · Answer

Would you please explain why B is the correct answer instead of C in question 3(primary purpose)?

GMATNinja · Answer

Let's break down the passage to understand its primary purpose:

First, the author poses a question: "Is it possible to decrease inflation without causing a recession and...   increase in unemployment? 
 Then, the author gives the orthodox answer ("no,"), two theories behind this answer, and an example to support this assertion (US and Europe in the 1980's). 
 The author presents a policy that seeks to disprove the "orthodox answer": "direct controls on wages and prices, without tight monetary and fiscal policies, can succeed in decreasing inflation" 
 Finally, the author presents several negative consequences of enacting the policy above.

Now, take a look at (C):
 
You could argue that the "controversial policy" referenced here is using "direct controls on wages and prices" to decrease inflation without causing high unemployment (seen above in bullet point #3). The author does introduce this policy, but does not  support  it -- the last sentence of the passage lists the negative consequences of enacting such a policy in fairly strong terms, and the author does not defend the policy at all. Because of this, (C) cannot be the primary purpose of the passage.

Now look at (B):
 
Here, the "generally accepted position" is the "orthodox answer" to the author's question: no, it is not possible to decrease inflation without causing a recession and its concomitant increase in unemployment.

The author examines this position by explaining two theories behind it, presenting a policy that seeks to disprove it, and then listing the negative consequences of this policy. The overall purpose of the passage is to explore various aspects of the "orthodox answer" to the author's question, which is nicely captured in this answer choice. (B) is the correct answer to question #3.

I hope that helps!

NandishSS · Answer

HI  GMATNinja ,  mikemcgarry ,  DmitryFarber ,  MagooshExpert  (Carolyn),  ccooley ,  GMATGuruNY ,  AjiteshArun   EMPOWERgmatVerbal ,  generis ,  jennpt ,  VeritasPrepErika ,  MartyTargetTestPrep

Can you please help me with the below question.

1. 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.

GMATNinja · Answer

Here is the most relevant sentence of the passage:
 
This tells us that "many European countries and the United States" applied certain policies and conquered high inflation in the 1980's. However, it doesn't suggest that these countries DIFFERED from other countries by applying these policies or beating high inflation. Perhaps many other countries also conquered high inflation -- there is nothing in the passage to suggest that the US/European countries were  unique  in this way.

The only piece of the sentence that suggests a  difference  between the US/European countries and other countries is the bit inside the parentheses -- "high  (by these countries' standards)  inflation." Here, the author implies that what the US/European countries consider to be high inflation  differs  from that classification in other countries. Because this is the only way that the author explicitly differentiates between the US/European countries and other countries, we are looking for an answer choice that focuses on this exact point.

(E) aligns nicely with our analysis -- the author suggests that what the US/European countries have different standards of what they consider to be high inflation.

(E) is the correct answer choice for question #1.

That is actually question #1 (see above for an explanation). If you have specific questions about #2, let us know?

I hope that helps!

jabhatta2 · Answer

experts -  SajjadAhmad ,  GMATNinja ,  u1983 ,  GMATNinjaTwo ,  workout ,  Gnpth

For question 2 -- while i see why A is accurate, wanted to review how to eliminate B specifically

argument from author : the use of wage and price controls" is that they don't really work and cause serious damage (inflation resurfaces and are negative for economic prospects for long term growth)

- Per option B, countries that have inflation, place stringent controls in an attempt to decrease this inflation

Is B wrong -- because perhaps option B talks about a future action AFTER inflation has already occurred whereas the argument is primarily talking about wage controls BEFORE inflation has already risen ?

Is that the reason why B is wrong ?

GMATNinja · Answer

You're on the right track!

The author argues that:
   wage and price controls eventually collapse, with the result that "hitherto-repressed inflation resurfaces," AND 
 price controls "do damage to the economy’s prospects for long-term growth."

To answer the question, we need to  strengthen  the above argument.

Heere's (B):
 
This just tells us that some countries attempt to address inflation with wage/price controls. It tells us nothing about the  results  of these efforts. Does inflation resurface? Do the controls damage the countries' prospects for long-term growth?

We have no idea. Maybe these policies have these effects, and maybe they do not. Because the author's argument is centered on the potential results of wage/price controls and (B) does not give us that information, (B) does not strengthen the author's argument.

Eliminate (B) for question 2.

I hope that helps!

UserMaple5 · Answer

GMATNinja

Could you please help explain question 2 ? I was stuck between Option A and Option D but I don't understand why Option D is wrong.

Thank you!!

GMATNinja · Answer

Question 2 
 
Question 2 asks us to strengthen the author's conclusion about wage and price controls.

He/she argues that:

wage and price controls eventually collapse, with the result that "hitherto-repressed inflation resurfaces," AND 
 price controls "do damage to the economy’s prospects for long-term growth."

Overall, the author thinks that wage/price controls are a pretty bad idea.

Does (D) strengthen this conclusion?
 
Hmm. (D) tells us about the believes of the people who  advocate  the use of wage/price controls -- they think that such controls deal with the underlying causes of inflation.

The author argues  against  these advocates. He/she thinks that wage controls will lead to pretty bad outcomes. So, does knowing the beliefs of the advocates strengthen the author's argument in any way?

Not that I can see. It provides some insight into the reasoning behind wage/price controls, but doesn't contribute in any way to the argument that these controls are a bad idea.

Contrast that to (A):
 
This provides great evidence for the author's claim that price controls "do damage to the economy’s prospects for long-term growth."

Eliminate (D), and (A) is the correct answer for question 2.

I hope that helps!

anshul0130 · Answer

VeritasKarishma  - I selected option B for question and I did review answer analysis shared by experts. However, can you explain why option B is incorrect ?

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.

Thanks,
Anshul

KarishmaB · Answer

We are given:
 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.

1. 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. 
Not given.

(B) It was possible to control without causing a recession.
We are given that it was controlled by tight monetary and fiscal policies that sharply increased unemployment. We are not given whether it did cause recession or not. In fact, it seems that they did cause recession because we are given " most economists agree that tight monetary and fiscal policies, which cause recessions, are necessary to... " 
 PanpaliaAnshul

(C) It was easier to control in those countries by applying tight monetary and fiscal policies than it would have been elsewhere.
Not given that in other countries it would have been harder to control.

(D) It was not caused by workers’ and employers’ expectations.
Not given that it was not caused by the “rational expectations” theory. The passage only mentions how it was controlled (by applying tight monetary and fiscal policies)

(E) It would not necessarily be considered high elsewhere.

Correct. Note "(by these countries’ standards)" given next to high inflation suggesting that it wasn't high by the standards of other countries.

Answer (E)

toothless123 · Answer

I had a doubt in Option A of Q2(price and wage policy). Option A talks about countries that  repeatedly  use price and wage controls, whereas author's conclusion doesn't clearly mention about repeated use of price wage controls. Can this be inferred from the passage or is it safe to assume that such policies will be applied repeatedly and not just once during a high inflation economic cycle?
Even though, I understand that this option is best out of all the options, my thought process regarding Option A is that maybe applying the policy  repeatedly  causes long term damage but we don't know the effect of applying it non-repeatedly (maybe applying this policy after a long time period once/ twice may not result in as much harm). And if author's conclusion doesn't mention the frequency then Option A may not actually support the conclusion.

GMATNinja · Answer

Question 2 
 
The right answer to this question should "most strengthen the author's conclusion about the use of wage and price controls." More specifically, it should strengthen the idea that wage and price controls ultimately "do damage to the economy’s prospects for long-term growth."

Notice that we aren't looking for something that  conclusively proves  the author's argument to be correct. Instead, we're looking for the answer choice that " most  strengthens" it.

Let's consider (A) again:

This fact suggests that wage and price controls do in fact damage long-term growth. For that reason, (A) is correct.

Of course, it doesn't  conclusively prove  that wage and price controls damage long-term growth. Maybe other factors, aside from wage and price controls, are actually causing the damage in these countries? In other words, maybe what we're seeing is not a causal effect, but merely a correlation of wage and price controls with lower growth?

So (A) isn't airtight evidence that the author's argument is 100% correct. Nonetheless, it  strengthens  the conclusion better than any other answer choice.

As you point out, the author doesn't specify the number of times wage and price controls need to be implemented, or how extensively they need to be applied, to slow economic growth. And since the author doesn't give us specifics here, it probably won't help to fill in the gaps ourselves. In fact, doing so runs the risk of distorting the author's position. For instance, we wouldn't want to change the author's argument to "one application of wage and price controls is always sufficient to damage long-term economic growth." That would certainly distort the author's point of view, and throw off our analysis.

Instead, let's stick with author's general point that wage and price controls ultimately "do damage to the economy's prospects for long-term growth." Keeping the author's exact argument in mind, we can conclude that (A), while not conclusive proof, is the best answer of the five we're given.

I hope that helps!

manhanld · Answer

Hi, I wonder why for question 2 B is wrong. Thankks

MartyTargetTestPrep · Answer

Question 2 asks the following:

Which of the following, if true, would most strengthen the author’s conclusion about the use of wage and price controls?

Let's find "the author’s conclusion about the use of wage and price controls."

It's the following from near the end of the pasage:

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.

That must be the author's conclusion since every other conclusion presented by the passage is someone else's conclusion.

Now, let's consider choice (B) in question 2.

(B) Countries that have extremely high inflation frequently place very stringent controls on wages and prices in an attempt to decrease the inflation.

Notice that what choice (B) says about what countries do does not support the conclusion that "wage and price controls eventually collapse, the hitherto-repressed inflation resurfaces, and ... a frozen structure of relative prices imposes distortions that do damage to the economy’s prospects."

In other words, since the conclusion is about the outcome of using wage and price controls and choice (B) just describes how "stringent" the controls are, (B) does nothing to support the conclusion.

After all, the fact that the controls are stringent doesn't mean that the controls "eventually collapse" or that "inflation resurfaces" or that "a frozen structure of relative prices imposes distortions that do damage to the economy’s prospects for long-term growth."

tinbq · Answer

Hi  GMATNinja ,

Can we consider tight monetary and fiscal policies as controversial policies (because some policymakers disagreed and they proposed a new approach)? If so, how do we eliminate choice C?

Thanks.

Is it possible to decrease inflation without causing a recession and

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Is it possible to decrease inflation without causing a recession and

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