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

Question

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

agdimple333 · Answer

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 · Answer

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 · Answer

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 · Answer

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 · Answer

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 · Answer

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

Jacksparrow1906 · Answer

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 · Answer

+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.

mayansd · Answer

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

.

ravi67741 · Answer

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

zest4mba · Answer

This is a strengthen question !!

fieldsrd · Answer

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

viks4gmat · Answer

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 · Answer

diffcult ques

goalset · Answer

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 · Answer

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

mamun2871 · Answer

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.

sumitkrocks · Answer

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 · Answer

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