Many policymakers in the United States claim that a high national

Question

‎ ‎ ‎ ‎ Many policymakers in the United States claim that a high national savings rate is a necessary precursor to a high investment rate by businesses. But despite the fact that households account for only one quarter of the total national savings (with businesses providing the balance), current economic policies are almost exclusively directed at increasing household savings. Such policies are deleterious because increased household savings result in reduced consumer buying, and the consequent loss of sales causes businesses to curtail investments in plants and equipment even when interest rates are low. An increase in business savings has the opposite effect: as businesses save more, they invest more in plants and equipment.

‎ ‎ ‎ ‎ The adverse effect of increased household savings on the business savings rate is suggested by data showing that an increase in household savings from 3 percent of the gross domestic product (GDP) in 1988 to 4 percent in 1991 accompanied a decline in sales that was concurrent with a decline in business savings from 13.2 percent to 11.7 percent of the GDP. The resulting decline in business investment and jobs ought to have convinced policymakers to abandon current policies and instead institute policies aimed at improving corporate profits, the primary source of business savings. Generally, as businesses profit and increase their investments, household incomes are also likely to increase.

1. According to the passage, which of the following accompanied the decline in sales mentioned in the highlighted text?

A. Higher interest rates
B. Reduced household incomes
C. Decreased household savings
D. Decreased business savings
E. Sluggish GDP growth

2. The passage suggests that which of the following is likely to contribute to an increase in household incomes?

A. Lower interest rates
B. A decrease in business investment
C. An increase in business savings
D. A decrease in consumer buying
E. A decrease in business profits

3. The author’s argument about current economic policy would most clearly be undermined if which of the following occurred?

A. Household incomes increased as business investment increased.
B. The business and the household savings rates each increased significantly.
C. The business savings rate grew, while the household savings rate declined.
D. Investment in plants and equipment doubled even though interest rates were high.
E. The household proportion of national savings remained constant, while total national savings declined.

Show Spoiler

Attachment:

Screenshot 2025-09-23 125710.png [ 423.16 KiB | Viewed 1120 times ]

Attachment:

Screenshot 2025-09-23 125640.png [ 371.06 KiB | Viewed 1120 times ]

Attachment:

Screenshot 2025-09-23 125610.png [ 371.39 KiB | Viewed 1120 times ]

Show Answer Question #1

Official Answer

D

Show Answer Question #2

Official Answer

C

Show Answer Question #3

Official Answer

B

aaronmart14 · Answer

The core logic:

- Claim: Policies that try to raise household saving are bad.

- Reasoning chain: Higher household saving → lower consumer spending → lower business sales → businesses cut investment and business saving (even if rates are low).

- Recommendation: Drop those policies and instead boost corporate profits (i.e., business saving), which raises investment and (typically) household income.

So the key assumption is a negative relationship: when household saving rises, business saving/investment fall.

3. The author’s argument about current economic policy would most clearly be undermined if which of the following occurred?

B. The business and the household savings rates each increased significantly.

If both household and business saving rise together, that contradicts the author’s core premise that higher household saving depresses business saving/investment. It shows they can move in the same direction, weakening the argument against policies that raise household saving.

Why not the others?

A. Supports the author (he already claims business investment tends to lift household incomes).

C. Fits the author’s story (business saving up while household saving down).

D. About interest rates; the author’s point doesn’t hinge on rates being high/low here.

E. Says total national saving fell with the household share constant—doesn’t touch the alleged causal harm of raising household saving.

KevoK · Answer

is it a me issue or as of the time my comment, there isnt any highlighted text https://gmatclub.com/forum/download/file.php?id=86003 GMAT-Club-Forum-890h8duf.png

Bunuel · Answer

___________________
Fixed. Thank you!

Robo_123 · Answer

Can someone plz explain the 3rd question?

Sajjad1994 · Answer

3. The author’s argument about current economic policy would most clearly be undermined if which of the following occurred?

Explanation

Main points of the passage:

National savings = household savings (25%) + business savings (75%). 
 Policymakers want high national savings ----> high investment. 
 But current policies only target household savings, ignoring business savings. 
 Increasing household savings ----> less consumer spending ----> lower sales ----> businesses invest less even if interest rates are low. 
 Increasing business savings ----> businesses invest more. 
 Data from 1988–1991: household savings goes up, business savings goes down, investment goes down. 
  Conclusion:  policymakers should instead aim to increase corporate profits (source of business savings) to boost investment.

So the author’s main criticism:  policies that increase household savings are counterproductive because they hurt business investment.  To undermine the argument , we need something that shows increasing household savings does not hurt business investment (or that the causal link is wrong).

The author’s key evidence:

When household savings went up, business savings & investment went down. Author interprets this as causal: higher household savings means lower business investment. If we could  show that both household savings and business savings can rise together  (contradicting the author’s causal story), that would undermine the claim that increasing household savings necessarily hurts business savings/investment.

A.  This is actually consistent with the last sentence of the argument. Doesn’t undermine.

B.   This directly contradicts the author’s view that they move in opposite directions due to the mechanism described. If both can rise significantly, then policies targeting household savings might not harm business savings. This would undermine the author’s reasoning.

C.  This is exactly what the author would predict from his own model (if household savings decline, consumer spending rises, helping business profits/savings). So it supports, not undermines.

D.  The author already says investment can be low even when interest rates are low, so high rates with high investment doesn’t directly contradict the household savings mechanism.

E.  This is irrelevant to the causal claim about household savings rise hurting business investment.

Answer: B

Many policymakers in the United States claim that a high national

Prep Toolkit

Top 5 GMAT Debrief Videos

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards

GMAT Reading Comprehension (RC) Questions

Many policymakers in the United States claim that a high national

Prep Toolkit

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards