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

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Is it possible to decrease inflation without causing a recession and

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10 Aug 2023, 15:25

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Question 3

tinbq

GMATNinja

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

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... [an] 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):

Quote:

support a controversial policy

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):

Quote:

examine a generally accepted position

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!

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.

As you point out, the passage discusses monetary and fiscal policies. Nonetheless, there are two good reasons to eliminate (C).

First, while the author discusses tight monetary and fiscal policies, he or she never explicitly supports them. So what exactly does the author say about these policies? Basically, the following three things:

Most economists support them.
Some government's policymakers insist they aren't necessary to get out of a recession.
Relying on other methods to control inflation can "do damage to the economy’s prospects for long-term growth."

Notice that pointing out the negative consequences of failing to use a policy is different than supporting that policy. For that reason, we can't claim that supporting the policy is the primary purpose of the passage.

From another angle: is the policy really controversial? That would also be hard to defend. We know that the "orthodox" view, which is held by "most economists," is that the policies are necessary to control inflation. It's true that some government policy makers disagree, but it would be a stretch to conclude from this that the policy is controversial. The fact that it's an "orthodox" view supported by "most economists" makes it sound pretty uncontroversial.

For both of those reasons, we can eliminate (C).

I hope that helps!

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