Public hospitals are suffering because of a lack of money

Question

Public hospitals are suffering because of a lack of money available for physical expansion projects. To help hospitals, local governments plan to offer municipal bonds with above-average interest rates to induce individuals to buy these bonds, because as local governments get more money from municipal bonds, more money becomes available to public hospitals for physical expansion projects.

Which of the following, if true, raises the most serious doubt regarding the effectiveness of local governments' plan to increase the amount of money available for hospital expansion projects?

(A) When local governments increase the interest on municipal bonds, the percentage of government funds allocated to non-expansion government projects increases correspondingly.
(B) The increased revenue local governments would receive as a result of offering municipal bonds with above-average interest rates would not offset the loss in revenue from personal income taxes during the first year of the plan.
(C) Even with interest rate incentives, some people will choose not to buy the municipal bonds.
(D) Individuals will generally not buy high-interest municipal bonds unless these bonds, when repaid, will help them cover home and healthcare payments.
(E) The municipal bonds would give all buyers, regardless of how many bonds they purchase, the same interest rate per bond.

It's A, and here's the OE:
 
The passage says that if municipal bonds are purchased, more money will go to hospital expansion plans... then answer A says that more money will NOT go to hospital expansion plans. This is a direct contradiction of what's given as concrete, irrefutable fact in the passage. Why is that correct?

bipinsingh · Answer

this is a weaken question so you can use the elimination technique to figure out the answer and it would take you to A.

what we have to prove with the answer is that
"more money  Would Not  becomes available to public hospitals for physical expansion projects."

(A) When local governments increase the interest on municipal bonds, the percentage of government funds allocated to non-expansion government projects increases correspondingly.  Supports what we have to prove because it says more money is allocated elsewhere so wont be available for the hospitals 
(B) The increased revenue local governments would receive as a result of offering municipal bonds with above-average interest rates would not offset the loss in revenue from personal income taxes during the first year of the plan.
  Taxes => redundant outside information and even if they suffer losses, they still might allocate the funds to the hospital 
(C) Even with interest rate incentives, some people will choose not to buy the municipal bonds.  if some people don't buy the bond, it does not mean that the bonds are not generating enough money  
(D) Individuals will generally not buy high-interest municipal bonds unless these bonds, when repaid, will help them cover home and healthcare payments.
  the bonds might as well help them cover healthcare payments, its a suggesting and not a binding statement 
(E) The municipal bonds would give all buyers, regardless of how many bonds they purchase, the same interest rate per bond.
  neutral statement, even if all get the same interest rate, they still might buy the bonds

mikeepeck · Answer

I just saw this problem, and I still disagree--I think B more clearly weakens the conclusion. Between A and B:

(A) When local governments increase the interest on municipal bonds, the percentage of government funds allocated to non-expansion government projects increases correspondingly.  This says that as the interest on municipal bonds increases, the local government gives more money to other projects. This says nothing about how much money the municipal bonds will generate. Maybe non-expansion projects will get some of the increased revenue, but hospitals will still get the rest. In other words, this doesn't necessarily mean that the plan will not be effective in increasing the available funds for the hospitals.

(B) The increased revenue local governments would receive as a result of offering municipal bonds with above-average interest rates would not offset the loss in revenue from personal income taxes during the first year of the plan. If there is an external factor already in place that would negate any revenues gained by the municipal bonds, then clearly the municipal bond plan wouldn't create any additional funds for the hospitals. This additional information would weaken the conclusion.

Thoughts??? This question is the fishiest I've seen so far in my studies, and I'm doing pretty darn well for the most part, but maybe I'm just missing something right under my nose.

gmat1220 · Answer

If you are assuming B you are AlSO assuming - there is no other way to offset the loss which is wrong. I don't think the conclusion is subservient to this. A is sufficient to get to conclusion.

mikeepeck · Answer

Could you explain that a little more clearly? I'm not sure what you mean. If (B) is true, then you can't assume that the loss in government revenue will be offset by something else, thus freeing up the municipal bond revenue for hospitals.

I understand that a weakener doesn't have to negate the conclusion, it just seems that (B) more clearly and definitively weakens the conclusion than (A).

Can anyone from Knewton weigh in on this? Thanks!

IndigoIntentions · Answer

The answer is clearly A.

First concentrate on the question stem "Which of the following,  if true , " --> You don't have to doubt the choices for truth, but you have to question the validity of them in helping the Govt. plan.

A) Mentions that if you increase the interest rates , a higher portion of Govt. funds will go to non-expansion projects. Thus, the option indicates that the money *might not* reach the intended cause. Hence A.

B) Why would there be a loss in personal income taxes is not clear? If anything, personal taxes should have increased because of high interest that people got. So there are other causes of losses in personal income taxes - (unrelated tax breaks? , natural disasters ?) ..

C)*Some will not buy* -> There are others buying.
D)*Generally not buy* -> There are others buying.
E)No relation with same interest rate. If government is getting the money, who cares?

ylee57 · Answer

Well explained thanks but could you tell why E is not true since, if people don't seem enthused about buying large quantities of bonds. ( The interest rate is same).

IndigoIntentions · Answer

It doesn't say that the people are less enthused. It just says that if a person buys in bulk he won't be given a special interest rate. 
Though even if people are less enthused, we don't know if they skip the issues all together. Refer my arguments for C) and D).

mikeepeck · Answer

ylee57: (E) just says that all the buyers of these bonds (the above-average interest rate bonds) will receive the same rate per bond. Thus it still stands that people will be more willing to buy these bonds (since they're at a higher interest rate), and this doesn't weaken the conclusion.

IndigoIntentions: Your explanation of (A) makes a lot of sense, but I think your explanation of (B) is off. Like you said, the assumption is that the answer choices are true, so you can't go into depth trying to figure out whether income tax revenues would increase or wouldn't... the answer choice says that they would decrease.

Looking at the question some more, I think I found my error.

Evidence 1: Hospitals are suffering from a lack of money for expansion
Evidence 2: More money for gov't from municipal bonds leads to more money available for hospitals' expansion projects
Assumption: increasing municipal bond interest rates leads to more bond sales
Conclusion: Local gov't should sell above average rate municipal bonds

I mistook Evidence 2 for the conclusion, but because it's stated as evidence, it's a straight up truth. Therefore, even if the local gov't has a huge loss in revenue from income taxes, it doesn't effect the argument. I went outside the argument and figured that the local gov't was working from one big bucket of money, but if municipal bond revenues are kept in a separate bucket, then the argument still stands unaffected.

Tough question! Thanks for the feedback everyone. And thanks to Jen from Knewton for the CR2 Knewton class that helped me make sense of this question.

gmat1220 · Answer

cool explanation ! The assumption that increased revenue from bonds should offset the loss due to taxes is wrong. Its may be / may not be. Who knows if Govt can overcome losses by some other way. We have no way to tell from the premise.

tvrs09 · Answer

Hi,

If the increased government revenues do not offset the losses that would occur as a result of fall in income taxes,then it might be true that the net revenues of the government have increased or decreased depending upon the actual values of revenue increase and losses from tax reductions.

Increase in revenues > losses from reduction in personal tax ==> Increase in net revenues
Increase in revenues < losses from reduction in personal tax ==> decrease in net revenues

So we cannot say with certainty whether the net revenues have increased.

This rules out option B

Please feel free to point flaw in the explanation if any

Cheers!!

abrakadabra21 · Answer

(B) The increased revenue local governments would receive as a result of offering municipal bonds with above-average interest rates would not offset the loss in revenue from  personal income taxes  during the first year of the plan.--> we are least bothered about personal income tax. it's not matter in the hand/ 
(C) Even with interest rate incentives,   some   people will choose not to buy the municipal bonds. --> if it would have all in sentence, then it's a problem otherwise no. 
(D) Individuals will   generally   not buy high-interest municipal bonds  unless these bonds, when repaid, will help them cover home and healthcare payments.   We don't anything about if bonds help or not so we can't say anything. 
(E) The municipal bonds would give all buyers, regardless of how many bonds they purchase, the same interest rate per bond. - so what? if interest rate is high than normal rate, it is still a good deal for buyer. right?

(A) When local governments increase the interest on municipal bonds, the percentage of government funds allocated to non-expansion government projects increases correspondingly.

if non expansion allocation increases, so ultimately what we are gaining through bonds is going somewhere else but expansion project. weaken 
IMO A

ravikrishna1979 · Answer

Even I do not agree with OA

As per pre-thinking the plan will fail if people do not buy bonds or so call high interest cannot be generated or sufficient bonds are not sold to help hospitals or ROI is not as per expected making the bonds to go on loss after some time.

(A) When local governments increase the interest on municipal bonds, the percentage of government funds allocated to non-expansion government projects increases correspondingly. ==>  NOT CORRECT 
It is not clear with % increase of government funds are allocated to non-expansion projects, it could be 1% or 2% or even less than 1%. With that we cannot deduce that that short of money will not be available

(D) Individuals will generally not buy high-interest municipal bonds unless these bonds, when repaid, will help them cover home and healthcare payments. ==>  CORRECT 
It is in parallel to pre-thinking to some extent compared to other options because nothing has been mentioned about what is the amount of repayment. Possiblility that individuals will not buy bonds. Atleast a close match and better answer than all other answers.

sayantanc2k · Answer

D does not state that the % is not enough to cover home and insurance payments. So you cannot immediately decide on D on this basis.

Option A is also not a very good answer since when government is planning to increase the interest rate specifically to fund the expansion project, why they would divert the fund to non-expansion project? It may be the case that generally there is a correlation between non-expansion project and interest rate, but in this particular situation, the correlation would not hold (it is not a causation after all), since fund allocation to expansion project is a decision by the government, not a  result  of high interest rate. So option A is also not very convincing.

Nevertheless coming back to option D, it  could be  a reason that the bonds would not sell. For strengthening / weakening questions "could be" scenario is enough to justify an answer (unlike assumption questions, in which "must be" scenario needs to be satisfied).

VerbalBot · Answer

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Public hospitals are suffering because of a lack of money

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Public hospitals are suffering because of a lack of money

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