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The function of capital markets is to facilitate an exchange of funds

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New post 20 Jul 2018, 12:53
Boomshockalocka wrote:
GMATNinja

Hi GMATNinja, could you please explain 278? I chose B but the answer is D.


Quote:
278. The author’s main point is argued by

(B) showing that the view opposite to the author’s is self-contradictory

Quote:
For B, "The function of capital markets is to facilitate an exchange of funds among all participants, and yet in practice we find that certain participants are not on a par with others." this sentence indicates that the view opposite to the author's is self-contradictory. Doesn't it?

In this sentence, the author makes a statement (in practice, certain participants are not on par with others) which contradicts the opposing view. This is a case of one person (the author) contradicting another (anyone who believes conventional financial analysis). This is not a case of self-contradiction, which would require the opposition to contradict their own logic or their own statements.

Quote:
278. The author’s main point is argued by

(D) showing that omissions in a theoretical description make it inapplicable in certain cases

Quote:
And I don't understand why D is correct. What is the intended "theoretical description"? And what are those "certain cases"?

The "theoretical description" is that capital markets facilitate an exchange of funds among all participants. This is a conventional view of market participation, and the author disagrees with this conventional view because it omits many cases (i.e. minority communities) wherein capital markets fail to fulfill their functions.

Thinking about this structurally, we see that in the first paragraph, the author declares that the conventional theory about capital markets is inaccurate. In the second paragraph, the author shows cases that are omitted by this conventional theory, and therefore can't be explained by that theory. In the third paragraph, the author explains the assumptions that lead to these cases' being omitted during conventional analysis. This structure matches the language in choice (D), and since we've eliminated every other answer choice, (D) is our best answer.

I hope that helps!
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New post 07 Nov 2018, 05:02
u1983 wrote:
Hello workout , bb , NaeemHasan or who ever has the OG10 or OG11 : At 2nd para ---- The existing system expresses definite socially based investment preferences that result from the previous allocation of income and that influence the allocation of resources for the present and future.

Is 'based' used in the actual book ? I am not sure why I am thinking 'biased' . - may be confused between the uses - 'society based' vs 'socially biased' !!

Yes, it is. Socially based. I have the soft copy and I have checked again.
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New post 09 Nov 2018, 12:17
u1983 wrote:
Hello workout , bb , NaeemHasan or who ever has the OG10 or OG11 : At 2nd para ---- The existing system expresses definite socially based investment preferences that result from the previous allocation of income and that influence the allocation of resources for the present and future.

Is 'based' used in the actual book ? I am not sure why I am thinking 'biased' . - may be confused between the uses - 'society based' vs 'socially biased' !!



I have a hard copy and I can confirm that it "based" - correct as written currently.
Thanks for actively reading and thx for asking!
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New post 16 Apr 2019, 14:29
jennpt Hi .. Yeah I did summarize individual paras but couldn't decipher the main idea as close as you have. Also,conventional generalization is something i couldn't understand.
Really good analysis this! Hard to come up with a main point with such precision. Thanks.
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New post 09 Aug 2019, 23:54
Hi,

Can someone please explain q. 280? confused between options C and D. Also, question 282
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New post 19 Aug 2019, 21:09
Riya21 wrote:
Hi,

Can someone please explain q. 280? confused between options C and D. Also, question 282

Question 5 (book question 280)


Quote:
280. Which of the following can be inferred about minority communities on the basis of the passage?

The author begins the passage by arguing against the idea that capital markets "facilitate an exchange of funds among all participants," because some participants are at a disadvantage in these markets.

He/she then states that one group of disadvantaged participants are members of minority communities. How are these communities disadvantaged? According to the author, the capital markets:
  • do not provide minority communities with access to the "aggregate flow of funds," and
  • do not generate credit or investment pathways to fund economic development in minority communities

One underlying reason for this dysfunction is that minority communities have a limited amount of financial resources. And finally, one the effect of this disadvantage is that it increases income inequality, which in turn makes capital more concentrated in certain types of investment.

Let's take a look at the evidence for (D):
Quote:
(D) They are not granted governmental subsidies to assist in underwriting the cost of economic development

From the above analysis, we know that the capital market does not generate credit or investment vehicles to fund economic development in minority communities. However, we are not given any information to confirm whether the government provides subsidies to fill this gap. Because we have no idea whether minorities are granted government subsidies, we cannot infer (D). Eliminate this answer choice.

Take a look at (C):
Quote:
(C) They do not receive the share of the amount of funds available for investment that would be expected according to traditional financial-market analysis.

That's a long answer choice! (C) tells us that minority communities do not have access to an "expected" amount of funds for investment.

In the last paragraph of the passage, we are told that traditional market analysis studies assume that "each individual in the community at large has the same access to the market and the same opportunity to transact and to express the preference appropriate to his or her individual interest."

However, the author argues against this notion by stating that capital markets do not provide minority communities access to the flow of fund in the United States.

Because traditional analyses predict equal access to funds, and the funds of minority communities do not have access to the flow of funds, we can infer that these communities do not have access to the "expected" amount of funds for investment.

(C) is the correct answer to question #5.

Question 7 (book question 282)


Quote:
282. According to the passage, analysts have conventionally tended to view those who participate in financial markets as

The author lays out the views of traditional (or conventional) analysts in the last paragraph of the passage. These analysts
  • pay little attention to the issues discussed in the preceding paragraph -- namely, how the structure of the market and unequal income distribution impact market activity
  • view people as independent and homogeneous (or identical to one another), and
  • assume that all participants have equal opportunities to transact in the marketplace

This last bullet fits well with (E):
Quote:
(E)[Analysts conventionally view participants as] having equal opportunities to engage in transactions

(E) is the correct answer to question #7.

I hope that helps!
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New post Updated on: 30 Aug 2019, 02:17
Para-1: Summary - Author talks about Capital Markets’ function sort of an ideal in nature but it’s not and gives a reason for that.

Para-2: Summary – Author continues his/her idea about the reason behind the shortcoming of function by giving an example. The example takes minority communities into consideration and enumerates what, how and why of the problem. He/she mentions that financial system does not create enough ways so that investment can be generated and gives another reason behind that i.e. rationing system. Thus, existing system is followed which is flawed in itself further increasing the inequality gap thus leading to non-uniform distribution of capital.

Para-3: Summary – In this para author refers to analysis of markets. He/she mentions that studies in general ignore the shortcomings and pay little attention to actors actually affecting capital market and makes assumption that every individual has perfect knowledge of the capital market and has same access/opportunities.

Overall Summary – Capital markets don’t work as they should. They make certain assumptions leading to non uniformity in the market i.e. certain pockets are left out.

1.
276. The main point made by the passage is that

(A) financial markets provide for an optimum allocation of resources among all competing participants by balancing supply and demand – WRONG. Nowhere it is mentioned in the passage that allocation is optimum.
(B) the allocation of financial resources takes place among separate individual participants, each of whom has access to the market – WRONG. Even if this is true it only pertains to a part of the passage
(C) the existence of certain factors adversely affecting members of minority groups shows that financial markets do not function as conventional theory says they function – CORRECT. This matches our summary.
(D) investments in minority communities can be made by the use of various alternative financial instruments, such as stocks and bonds – WRONG. The option covers only a part of scope of passage.
(E) since transaction costs for stocks, bonds, and other financial instruments are not equally apportioned among all minority-group members, the financial market is subject to criticism – WRONG. ‘Apportioned equally among all minority group’s subtly changed from all community members. Covers only a part of scope of passage even if true.

2.
277. The passage states that traditional studies of the financial market overlook imbalances in the allocation of financial resources because

(A) an optimum allocation of resources is the final result of competition among participants – WRONG. If this is true it is causaly wrong.
(B) those performing the studies choose an oversimplified description of the influences on competition – CORRECT. Refer para 3 second line “analysts’ inherent preferences” for the simple model’.
(C) such imbalances do not appear in the statistics usually compiled to measure the market's behavior. – WRONG. No mentioned anywhere in the passage.
(D) the analysts who study the market are unwilling to accept criticism of their methods as biased – WRONG. No mentioned anywhere in the passage.
(E) socioeconomic differences form the basis of a rationing mechanism that puts minority groups at a disadvantage – WRONG. Might be true but this is not the reason behind overlooking.

3.
278. The author’s main point is argued by

(A) giving examples that support a conventional generalization – WRONG. Author is not supporting anything conventional.
(B) showing that the view opposite to the author’s is self-contradictory – WRONG. Opposite view not mentioned anywhere in the passage.
(C) criticizing the presuppositions of a proposed plan – WRONG. Irrelevant.
(D) showing that omissions in a theoretical description make it inapplicable in certain cases – CORRECT. A model with assumptions as proposed by analyst might not work actually n real life.
(E) demonstrating that an alternative hypothesis more closely fits the data – WRONG. Alternative hypothesis is not mentioned anywhere in the passage.

4.
279. A difference in which of the following would be an example of inequality in transaction costs as alluded to in lines 40-43 [Moreover, it is assumed that transaction costs for various types of financial instruments (stocks, bonds, etc.) are equally known and equally divided among all community members.]?

(A) Maximum amounts of loans extended by a bank to businesses in different areas – WRONG. Loans’ amount may vary as much as possible depending on the scale of business.
(B) Fees charged to large and small investors for purchasing stocks – CORRECT. Though this might look straight forward and leads to doubting this option this is correct in the sense that for a single transaction between a large and a small investor both should be charged same. Buying both stocks and bonds then both should be charged same amount. Any difference in the charges would lead to inequality.
(C) Prices of similar goods offered in large and small stores in an area – WRONG. Prices may vary depending on the cost entailed by the stores which customer must be known off.
(D) Stipends paid to different attorneys for preparing legal suits for damages – WRONG. Stipends may differ in that an experienced attorney might have huge compared to a relatively newbie.
(E) Exchange rates in dollars for currencies of different countries – WRONG. Rates may vary for different reasons so can’t be treated as inequality.

5.
280. Which of the following can be inferred about minority communities on the basis of the passage?

(A) They provide a significant portion of the funds that become available for investment in the financial market. – WRONG. Significant proportion is neither mentioned nor can be inferred from the passage.
(B) They are penalized by the tax system, which increases the inequality of the distribution of income between investors and wage earners. – WRONG. This one is closest of being right answer for simply using word penalized but a closer look and understanding shows that it changes the meaning of the passage.
(C) They do not receive the share of the amount of funds available for investment that would be expected according to traditional financial-market analysis. – CORRECT. Since the passage is about inequality among communities this makes sense.
(D) They are not granted governmental subsidies to assist in underwriting the cost of economic development – WRONG. Govt. granting subsidies to minority communities can’t be inferred rather a rationing mechanism is referred here which causes further problems.
(E) They provide the same access to alternative sources of credit to finance businesses as do majority communities. – WRONG. Exactly opposite to what is discussed in the passage even if it is true.

6.
281. According to the passage, a questionable assumption of the conventional theory about the operation of financial markets is that

(A) creditworthiness as determined by lenders is a factor determining market access – WRONG. Creditworthiness is nowhere mentioned in the passage.
(B) market structure and market dynamics depend on income distribution – WRONG. Exactly opposite to what is discussed in the passage.
(C) a scarcity of alternative sources of funds would result from taking socioeconomic factors into consideration – WRONG. Incorrect causual relationship.
(D) those who engage in financial-market transactions are perfectly well informed about the market – CORRECT. Refer para 3 where it is mentioned that every individual has equal access and opportunity in the market which is actually not the case in reality.
(E) inequalities in income distribution are increased by the functioning of the financial market – WRONG. Not an assumption made anywhere rather existing system increases inequalities. Refer Para 2.

7.
282. According to the passage, analysts have conventionally tended to view those who participate in financial markets as

(A) judging investment preferences in terms of the good of society as a whole – WRONG. Irrelevant.
(B) influencing the allocation of funds through prior ownership of certain kinds of assets – WRONG. Irrelevant.
(C) varying in market power with respect to one another – WRONG. Close but passage clearly mentions that every individual has equal access and opportunity.
(D) basing judgments about future events mainly on chance – WRONG. Irrelevant.
(E) having equal opportunities to engage in transactions – CORRECT. Refer para 3.

Completed in 11:36 min. All correct.
I could not believe myself since my RC is not good. :)
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Originally posted by lnm87 on 22 Aug 2019, 20:24.
Last edited by lnm87 on 30 Aug 2019, 02:17, edited 1 time in total.
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New post 29 Aug 2019, 23:42
Hi,
in question 278 i marked option C
Can someone pls explain why option D is better than option C

Does the author criticize the presupposition of the proposed plan or does he show the omissions?
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New post 30 Aug 2019, 02:15
devavrat wrote:
Hi,
in question 278 i marked option C
Can someone pls explain why option D is better than option C

Does the author criticize the presupposition of the proposed plan or does he show the omissions?


Look for negative words in the passage to prove C as correct. You might not find one. Overall, get a hang of tone of author in the passage to better understand the it.
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Re: The function of capital markets is to facilitate an exchange of funds   [#permalink] 30 Aug 2019, 02:15

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