In the past two years, the effects of the worldwide economic : Critical Reasoning (CR)

guygmat

Intern

Joined: 18 Jun 2011

Posts: 42

In the past two years, the effects of the worldwide economic [#permalink]

18 Jun 2011, 21:06

2

Kudos

8

Bookmarks

00:00

A

B

C

D

E

Difficulty:

55% (hard)

Question Stats:

61% (01:53) correct

39% (02:18) wrong

based on 626 sessions

Hide Show timer Statistics

In the past two years, the effects of the worldwide economic downturn have been felt in all corners of the economy. For example, data from the Crescent City furniture industry show that sales have decreased 12% compared to two years ago. Yet the banks who provide working capital to the furniture retailers report that, in the first year of the downturn, the proportion of credit they provided to the retailers that was repaid on time dropped sharply, while in the second year it returned to normal levels.
Question
Which one of the following, if true, most helps to explain the change in credit repayment reported?

A)The total dollar amount of the loans decreased slightly between the first year and the second.
B)New restrictions on the banking industry instituted since the economic downturn began have limited the number of loans banks can make to troubled borrowers.
C)The largest furniture chain in Crescent City slashed prices in the second year in order to stimulate sales.
D)Almost all of the most financially troubled furniture retailers went out of business at the end of the first year of the economic downturn.
E)Between the first and second years of the recession, wholesalers were forced to significantly raise the prices they charged to retailers.

Source: Grockit

Show Answer

Official Answer

Official Answer and Stats are available only to registered users. Register/Login.

request expert reply

agdimple333

Manager

Joined: 24 Mar 2011

Posts: 229

Location: Texas

Re: Must Be True CR [#permalink]

19 Jun 2011, 15:10

my answer was C. Not sure how the OA is D. if retailers went out of business at the end of the 1st year, how did they repay in 2nd year...

dreambeliever

Manager

Joined: 24 Nov 2010

Posts: 119

Location: United States (CA)

Concentration: Technology, Entrepreneurship

Schools: Duke '15 Ross '15

Re: Must Be True CR [#permalink]

19 Jun 2011, 15:28

i had to choose between b and d. finally went for b because that was similar to the reason i had thought of before reading the answer choices.

from the question: Sales went down. Loan defaults went up the 1st year but was normal the 2nd year.

Possible reason: banks were more careful in lending money and lent to only clients who could pay back for sure.

while D might also be a possible reason, B sounds more sufficiently convincing to me. IMO, all financially troubled retailers need not go out of business for default rates to go down. It is sufficient that such retailer are not lent any money for default rates to be normal.

ardk

Manager

Joined: 09 Apr 2010

Status:Preparing for GMAT !!!

Posts: 104

Re: Must Be True CR [#permalink]

20 Jun 2011, 11:44

2

Kudos

I chose D. Since the most troubled retailers went out of business after 1st year, the remaining retailers had greater market, which in turn results in a better business for them. That is the only way they could pay in 2nd year, IMO.

DevilDoggNC

Manager

Joined: 20 Dec 2010

Posts: 134

Schools:UNC Duke Kellogg

Re: Must Be True CR [#permalink]

23 Jun 2011, 14:13

The stimulus mentions that the effects of the downturn have been felt in "all corners" of the economy.

So -- D -- I'm not entirely convinced.

D would have been OK if not for the opening sentence.

B seems right --- because if the banks now only gave loans to "proper" businesses -- there is a much better chance of getting proper payments....

toughmat

Manager

Joined: 19 Apr 2011

Posts: 59

Re: Must Be True CR [#permalink]

24 Jun 2011, 02:21

2

Kudos

From my understanding the restrictions instituted since the economic downturn began i.e they are applicable for both years. Hence we can eliminate B

jakitt

Intern

Joined: 24 May 2011

Posts: 20

Concentration: Finance, Entrepreneurship

Schools: Boston U (S) Babson (M$) Kenan-Flagler '14 (WL) Foster (A)

GPA: 3.53

WE:Other (Accounting)

Re: Must Be True CR [#permalink]

07 Aug 2011, 09:29

I was hesitated between B and D, and finally chose B.

Jacksparrow1906

Manager

Joined: 03 Feb 2010

Posts: 168

Concentration: Strategy

Schools: Northwestern (Kellogg) - Class of 2014

WE:Marketing (Computer Hardware)

Re: Must Be True CR [#permalink]

09 Aug 2011, 12:28

toughmat wrote:

From my understanding the restrictions instituted since the economic downturn began i.e they are applicable for both years. Hence we can eliminate B

I agree, that was the tricky part of the question. The restrictions wouldn't explain why they weren't able to pay the first year.

The answer is D

mayansd

Manager

Joined: 25 Jul 2010

Status:Applying for 2012 B school admissions

Posts: 102

Location: India

Concentration: Strategy, Entrepreneurship

GMAT 1: 720 Q51 V35

GMAT 2: 760 Q50 V44

GPA: 3.6

WE:Manufacturing and Production (Pharmaceuticals and Biotech)

Re: Must Be True CR [#permalink]

09 Aug 2011, 22:30

1

Kudos

1

Bookmarks

+1 D

I had done a similar question before with almost the same answer choices, so this one was easy for me. Also this question is tagged as "must be true", but I think it is a "resolve a paradox" type of question. The correct answer choices of "must be true" questions cannot bring in new information and are in most of the cases a simple paraphrase of one or more of the premises themselves.

Paradox in the Argument: Proportion of loan repaid dropped sharply in the first year, but returned to normal levels in the second year.

Correct answer choice will resolve the paradox by explaining the "but" in the argument.

guygmat wrote:

Which one of the following, if true, most helps to explain the change in credit repayment reported?

A)The total dollar amount of the loans decreased slightly between the first year and the second.
irrelevant-doesn't explain why the proportion of loans repaid returned to normal levels, total amount of loans may have dropped and the proportion of loans returned may still have remained the same.

B)New restrictions on the banking industry instituted since the economic downturn began have limited the number of loans banks can make to troubled borrowers.
if you followed why Option A is wrong, this option can easily be seen as irrelevant, and because of the same reasons. Even if the total amount of loans dropped, the proportion of loans repaid could remain the same. An increase or decrease in number doesn't guarantee a similar increase or decrease in proportion (or percentage). If, however, this option stated that banks are diverting loans from troubled retailers to well-off retailers, then this option might have been a contender.

C)The largest furniture chain in Crescent City slashed prices in the second year in order to stimulate sales.
out of scope, we are talking about all furniture retailers, not just one or the biggest player. Also we do not know whether the stimulated sales were sufficient to repay the loans

D)Almost all of the most financially troubled furniture retailers went out of business at the end of the first year of the economic downturn.
correct, if most of the troubled retailers who had difficulty in repaying loans went out of business at the end of the first year, in the second year only those those retailers remained who could repay the loans, thus increasing the proportion of loans repaid and explaining the paradox

E)Between the first and second years of the recession, wholesalers were forced to significantly raise the prices they charged to retailers.
irrelevant, we are concerned about retailers and not wholesalers. And also if this option were true, retailers would be left more troubled by the rise in prices, thus making the paradox more grave.

_________________

cheers
Mayank
My GMAT Journey: 720 + dare = 760

Signature Read More

mayansd

Manager

Joined: 25 Jul 2010

Status:Applying for 2012 B school admissions

Posts: 102

Location: India

Concentration: Strategy, Entrepreneurship

GMAT 1: 720 Q51 V35

GMAT 2: 760 Q50 V44

GPA: 3.6

WE:Manufacturing and Production (Pharmaceuticals and Biotech)

Re: Must Be True CR [#permalink]

09 Aug 2011, 22:33

yup, an easy point I missed out. Eliminates B straightforward. Kudos to you for reminding me about this type of wrong answer choice :wink:

.

toughmat wrote:

From my understanding the restrictions instituted since the economic downturn began i.e they are applicable for both years. Hence we can eliminate B

_________________

cheers
Mayank
My GMAT Journey: 720 + dare = 760

Signature Read More

ravi67741

Intern

Joined: 13 Mar 2011

Status:want to get 720+in GMAT

Posts: 23

Re: Must Be True CR [#permalink]

24 Aug 2011, 10:55

+1 for D...although my answer was E......but D wins

zest4mba

Intern

Joined: 09 Feb 2010

Posts: 39

Re: Must Be True CR [#permalink]

07 Sep 2011, 05:27

This is a strengthen question !!

fieldsrd

Intern

Joined: 15 Nov 2010

Posts: 28

Re: Must Be True CR [#permalink]

07 Sep 2011, 18:46

I'm not convinced with D. But of all the given choices D seems correct.

viks4gmat

Manager

Joined: 04 Jun 2011

Posts: 99

Re: Must Be True CR [#permalink]

08 Sep 2011, 12:27

Izvos wrote:

doubting btw b and d

definately D

B)New restrictions on the banking industry instituted since the economic downturn began have limited the number of loans banks can make to troubled borrowers.

but this does not explain why 1st year has more number of defaulters and how suddenly for the second yr the number decreased.

prateekbhatt

Director

Joined: 28 Jun 2011

Status:My Thread Master Bschool Threads-->Krannert(Purdue),WP Carey(Arizona),Foster(Uwashngton)

Posts: 769

Re: Must Be True CR [#permalink]

22 Oct 2011, 13:45

2

Bookmarks

diffcult ques

goalset

Manager

Joined: 08 Aug 2011

Posts: 79

GPA: 3.5

Re: In the past two years, the effects of the worldwide economic [#permalink]

12 Jan 2012, 23:07

D it is.
If the financially struggling furniture retailers were in business in the first year then the payments will be late to the bank and if they are out of business in the second year and the remaining furniture retailers who are not struggling financially will pay on time that will result in the turnaround in the bank report.

Amit1408GMAThunk

Intern

Joined: 16 Mar 2013

Posts: 34

Re: In the past two years, the effects of the worldwide economic [#permalink]

08 Aug 2014, 03:16

Chose E but surely D is the correct answer choice....

B

mamun2871

Intern

Joined: 11 Mar 2015

Posts: 21

Re: In the past two years, the effects of the worldwide economic [#permalink]

10 Jun 2018, 22:29

D is correct. Because, if most of the troubled retailers went out from business after first year then in second year remained retailers got more market share to sell their products. Eventually, they can generate enough money to repay their loans.

P

sumitkrocks

Director

Joined: 02 Jul 2017

Posts: 659

Location: India

Concentration: Strategy, Technology

Schools: IIMA PGPX'22 ISB'22 NUS '23 ESADE IESE '24 NTU

GMAT 1: 730 Q50 V39

GMAT 2: 710 Q50 V36

In the past two years, the effects of the worldwide economic [#permalink]

11 Jun 2018, 00:01

I can see a lot of people supporting B here ..but D is the clear winner here for following reasons ..

Passage talks about the Proportion of credit repaid returned to normal value in the 2nd year ..please note we are talking about proportion ..i.e percentage or the ratio ...
Decreasing the total number of credit given will not help in any way unless we are not sure reduction of credit is mostly in the bad credit or in cases where repayment were not going to happen ..hence B is eliminated ..

D clearly tells us ..Almost all of the most financially troubled furniture retailers went out of business at the end of the first year of the economic downturn.
Hence we are sure reduction in number of financially troubled retailers must have helped to improve the proportion in the 2nd year

Hence D .
Hope it helps

VerbalBot

Non-Human User

Joined: 01 Oct 2013

Posts: 17205

Re: In the past two years, the effects of the worldwide economic [#permalink]

19 Feb 2024, 22:06

Hello from the GMAT Club VerbalBot!

Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).

Want to see all other topics I dig out? Follow me (click follow button on profile). You will receive a summary of all topics I bump in your profile area as well as via email.
_________________

Signature Read More

gmatclubot

Re: In the past two years, the effects of the worldwide economic [#permalink]

19 Feb 2024, 22:06

GMAT Critical Reasoning (CR) Questions

In the past two years, the effects of the worldwide economic

GMAT Question Banks