Many economists believe that a high rate of business savings

Question

Many economists  believe that a high rate of business savings in the United States is a necessary precursor to investment, because business savings, as opposed to personal savings, comprise almost three-quarters of the national savings rate, and the national savings rate heavily influences the overall rate of business investment.

These economists further postulate that real interest rates-the difference between the rates charged by lenders and the inflation rates-will be low when national savings exceed business investment (creating a savings surplus),and high when national savings fall below the level of business investment (creating a savings deficit ).

However, during the 1960's real interest rates were often higher when the national savings surplus was large. Counterintuitive behavior also occurred when real interest rates skyrocketed from 2 percent in 1980 to 7 percent in 1982, even though national savings and investments were roughly equal throughout the period. Clearly, real interest rates respond to influences other than the savings/investment nexus. Indeed, real interest rates may themselves influence swings in the savings and investment rates. As real interest rates shot up after 1979, foreign investors poured capital into the United States, the price of domestic goods increased prohibitively abroad, and the price of foreign-made goods became lower in the United States. As a result, domestic economic activity and the ability of businesses to save and invest were restrained.   1 
 1. The passage is primarily concerned with

(A) contrasting trends in two historical periods
(B) presenting evidence that calls into question certain beliefs
(C) explaining the reasons for a common phenomenon
(D) criticizing evidence offered in support of a well-respected belief
(E) comparing conflicting interpretations of a theory

2 
 2. According to the passage, which of the following resulted from foreign investment in the United States after 1979?

(A) An increase in real interest rates
(B) A decrease in the savings rate of certain other nations
(C) An increase in American investment abroad
(D) An increase in the price of American goods abroad
(E) A decrease in the price of domestic goods sold at home

3 
 3. The author of the passage would be most likely to agree with which of the following statements regarding the economists mentioned in line 1?

(A) Their beliefs are contradicted by certain economic phenomena that occurred in the United States during the 1960's and the 1980's.
(B) Their theory fails to predict under what circumstances the prices of foreign and domestic goods are likely to increase.
(C) They incorrectly identify the factors other than savings and investment rates that affect real interest rates.
(D) Their belief is valid only for the United States economy and not necessarily for other national economies.
(E) They overestimate the impact of the real interest rate on the national savings and investment rates.

4 
 4. The passage suggests that the economists mentioned in the  highlighted text  would have expected which of the following to occur during the 1960's in the United States?

A. Savings and investment rates to be equal in spite of high real interest rates
B. Real interest rates to remain low when the national savings surplus was large
C. Investment rates to remain constant while the national savings rate changed
D. The national economy to suffer a decline as a result of high national savings rates
E. Businesses to be encouraged to save due to high real interest rates

VijayShanker · Answer

Key points:

a.  Many economist belive that business saving influences investment.

b.  Also, good saving helps in reducing the interest rate on lending money repayment.

c.  But facts are opposite; author provides some examples. There is some other factor which influences saving/investments. In fact, interest rate influences saving/investment.

->  Primarily, author talks about what many economist feel and then provides some facts/examples to show they are wrong.

The passage is primarily concerned with
A. contrasting trends in two historical periods
 B. presenting evidence that calls into question certain beliefs 
C. explaining the reasons for a common phenomenon
D. criticizing evidence offered in support of a well-respected belief
E. comparing conflicting interpretations of a theory

-" Clearly, real interest rates respond to influences other than the savings/investment nexus. Indeed, real interest rates may themselves influence swings in the savings and investment rates. "

According to the passage, which of the following resulted from foreign
investment in the United States after 1979?
A. An increase in real interest rates
B. A decrease in the savings rate of certain other nations
C. An increase in American investment abroad
 D. An increase in the price of American goods abroad 
E. A decrease in the price of domestic goods sold at home

-"As real interest rates shot up after 1979, foreign investors poured capital into the United States,  the price of domestic goods increased prohibitively abroad , and the price of foreign-made goods became lower in the United States."

The author of the passage would be most likely to agree with which of the following
statements regarding the economists mentioned in line 1?
 A. Their beliefs are contradicted by certain economic phenomena that occurred in the
United States during the 1960's and the 1980's. 
B. Their theory fails to predict under what circumstances the prices of foreign and domestic
goods are likely to increase.
C. They incorrectly identify the factors other than savings and investment rates that
affect real interest rates.
D. Their belief is valid only for the United States economy and not necessarily for other
national economies.
E. They overestimate the impact of the real interest rate on the national savings
and investment rates.

- This is the main idea.

mSKR · Answer

3. The author of the passage would be most likely to agree with which of the following statements regarding the economists mentioned in line 1?

(A) Their beliefs are contradicted by certain economic phenomena that occurred in the United States during the 1960's and the 1980's.
(B) Their theory fails to predict under what circumstances the prices of foreign and domestic goods are likely to increase.
(C) They incorrectly identify the factors other than savings and investment rates that affect real interest rates.
(D) Their belief is valid only for the United States economy and not necessarily for other national economies.
(E) They overestimate the impact of the real interest rate on the national savings and investment rates.

Why E can't be answer for Question =3 ?

i rejected A because their belief was high rate of business savings in the United States is a necessary precursor to investment. They didn't take into account other factors that could vary rate. So it means they over emphasized the impact of real interest rate on the national savings and investment rates.

GMATNinja   VeritasKarishma

GMATNinja · Answer

Question 3 
 
The economists mentioned in line 1 have two major beliefs:

(1) That  "a high rate of business savings in the United States is a necessary precursor to investment,"  and
(2) That  "real interest rates...will be low when national savings exceed business investment,...and high when national savings fall below the level of business investment"

The author then provides examples of times when interest rates were high even though national savings were high. This challenges the second belief of the economists.

So, which answer choice would the author agree with?
 
The third paragraph describes several instances in the 1960s and the 1980s when economic phenomena contradicted the economists' beliefs:

In the 1960s  "real interest rates were often higher when the national savings surplus was large"  
 Real interest rates rose sharply between 1980 and 1982  "even though national savings and investments were roughly equal throughout the period"

(A) looks good.

(B) tells us:
 
The third paragraph tells us about a situation in 1979 when the price of domestic and foreign goods changed. However, there is no prediction attributed to the economists earlier in the passage regarding what circumstances would cause an increase in the price of foreign and domestic goods. Nor is there a description of a theory that would make the same prediction.

There is no information in the passage to suggest (B) is the right answer, let's cross it out and move on.

There's no suggestion in the passage that the economists  incorrectly identify  other factors. The passage suggests the economists  don't  identify any other factors other than savings and investment rates that affect real interest rates.

(C) is not supported by the information in the passage, so eliminate it.

The economists and the author both focus on the United States Economy, and the author challenges the economists' beliefs. So, the author DOESN'T think that the economists' belief is valid for the US economy. Additionally, we have to idea whether the author thinks that their belief would be valid for other economies.

(D) is out.

When looking at (E), it's important to remember exactly what causes what, according to the economists.

The economists argue that " real interest rates...will be low when national savings exceed business investment."  So, the economists think that national savings/business investment impact interest rates.
 
The author challenges this belief, saying that  "clearly, real interest rates respond to influences other than the savings/investment nexus."  Here, the author says that savings/investment are not the only factors impacting interest rates.

Both these statements discuss whether, and to what degree, the national savings and investment rates impact the real interest rate. There is no indication to suggest the economists believe the real interest rate impacts national savings and investment rates.

Therefore, the author would not agree that the economists  overestimate  this impact -- neither the author nor the economists believe the impact goes in that direction.

For this reason, we can eliminate (E).

This leaves us with (A), which is the correct answer to question 3.

I hope that helps!

the27s · Answer

Hello  GMATNinja

I'm unable to eliminate option C for Q3 based on the following lines in para 3

'Clearly, real interest rates respond to influences other than the savings/investment nexus'

Can you please help me understand where my interpretation is wrong ?

Posted from my mobile device

Carcass · Answer

Many economists believe that a high rate of business savings in the United States is a necessary precursor to investment ,  because business savings, as opposed to personal savings ,  comprise almost three-quarters of the national savings rate, and the national savings rate heavily influences the overall rate of business investment.

These economists further  postulate  that   real interest rates-the difference between the rates charged by lenders and the inflation rates-will be low when national savings exceed business investment (creating a savings surplus),and high when national savings fall below the level of business investment (creating a savings deficit ).

However, during the 1960's real interest rates were often higher when the national savings surplus was large. Counterintuitive behavior also occurred when real interest rates skyrocketed from 2 percent in 1980 to 7 percent in 1982, even though national savings and investments were roughly equal throughout the period.   Clearly, real interest rates respond to influences other than the savings/investment nexus .  Indeed, real interest rates may themselves influence swings in the savings and investment rates. As real interest rates shot up after 1979, foreign investors poured capital into the United States, the price of domestic goods increased prohibitively abroad, and the price of foreign-made goods became lower in the United States. As a result, domestic economic activity and the ability of businesses to save and invest were restrained.

(A) Their beliefs are contradicted by certain economic phenomena that occurred in the United States during the 1960's and the 1980's.

yes they believed that was only X and maybe was Y or X+Y

(C)  They incorrectly identify the factors other than savings and investment  rates that affect real interest rates.

NO they believed that was X and instead was Y. They did not identify OTHER factors. They were not aware of them. The empirical evidence showed to us a different scenario. Clearly form the passage C is wrong

we cannot say they were wrong simply because they did not know those factors whatsoever

GMATNinja · Answer

Question 3 
 
In paragraph 2, the author tells us what certain economists think: these economists believe that "that real interest rates   will be low when national savings exceed business investment (creating a savings surplus),and high when national savings fall below the level of business investment (creating a savings deficit).

Notice that these economists only mention two factors that influence real interest rates:  national savings  and  business investment .

Then, in paragraph 3, the author  disagrees  with these economists, saying that real interest rates must be influenced by factors OTHER than the two mentioned by the economists.

Question 3 asks us what the author would think about the economists. Here's (C):
 
This isn't quite right, because the economists ONLY identified savings and investment rates as factors that influence real interest rates. So the author doesn't think that they "incorrectly identify" other factors -- he/she thinks that they FAILED to identify other factors.

Because the economists  didn't  identify any other factors, the author wouldn't agree with (C) for question 3.

I hope that helps!

RD135 · Answer

KarishmaB   GMATNinja

Hi Experts, apologies if I am asking a dumb question, but I am literally confused with question no. 2. Either I need to throw my SC understanding so far into the garbage, or I am seriously blindsided by some economic relationship that is so trivial and seemingly straightforward for others but not the case for me; thus, this question wasted a lot of time. Expert comments from your brain trust will be constructive. Here is my analysis.

If we look at this statement in the passage - 
As real interest rates shot up after 1979, ("As" introducing a subordinate clause which is more of a cause or the reason for the list that'll follow). The list includes their items; the 3rd item (three clauses) is joined by comma + and (a typical construction for GMAT to introduce a list). So, three items are 
1. foreign investors poured capital into the United States, 
2. the price of domestic goods increased prohibitively abroad, and 
3. the price of foreign-made goods became lower in the United States.

Now, question 2 asks: 
According to the passage, which of the following resulted from foreign investment in the United States after 1979?
(A) An increase in real interest rates - "foreign investment" resulted from "An increase in real interest rates" and not the other way around. Wrong. 
(B) A decrease in the savings rate of certain other nations - "other nations" we don't know as they are not mentioned. Yes, consumers have to spend more for US products, but that doesn't necessarily mean that the national savings rate, which comprises business and personal savings rates, is low. But the other way to look at it is that if the national savings rate comprises business and personal savings rates, at best, if either business or ordinary people spend more for buying US-made goods, there is a negative impact on the national savings rate. Yes, I am not happy with this option, but let me share my problem with other options. 
(C) An increase in American investment abroad - We don't know and are not mentioned in the passage. 
(D) An increase in the price of American goods abroad - Yes, this line "increase in the price of American goods abroad" is mentioned in the passage. But it includes the other two effects of "real interest rates shot up after 1979." 
(E) A decrease in the price of domestic goods sold at home - Not mentioned.

Am I missing how to read this statement: "As real interest rates shot up after 1979, foreign investors poured capital into the United States, the price of domestic goods increased prohibitively abroad, and the price of foreign-made goods became lower in the United States."? Am I missing the cause and effect between "foreign investors poured capital into the United States" and "the price of domestic goods increased prohibitively abroad"? If so, then how can I improve to read such cause-effect statements?

Yes, the words mentioned in the option D are mentioned in some shape and form in the line of interest. Or is the question straightforward that we just need to shut off our brains, and as the other four are not mentioned, one is mentioned, whatever the relationship is? Let's choose that.

Please share your valuable insights.

KarishmaB · Answer

I understand why you are upset and perhaps with good reason too. I don't know what the source of this passage is but hopefully, it is not an official passage. That said, I would mark it as (D) for sure because there is a good economic reason behind it. Perhaps GMAT wouldn't expect you to know it or think through it but you are planning on a business degree so might as well understand it. "As real interest rates shot up after 1979, foreign investors poured capital into the United States, the price of domestic goods increased prohibitively abroad, and the price of foreign-made goods became lower in the United States. As a result, domestic economic activity and the ability of businesses to save and invest were restrained." We could consider that 'real interest rates' caused these three effects but it could be considered a sequence of events one leading to the other. As A happened, B happened, C happened, and D happened. As interest rates shot up (in US), more foreign capital came in (to take advantage of the high interest rates). When foreign currency (say Euros) comes in (supply of foreign currency has increased), your domestic currency (Dollar) strengthens. So a domestic USD100 bag is more expensive to Europeans now. But a Euro 100 bag made in Europe is cheaper for you in US, say. Hence the increase in foreign capital leads to an increase in the price of American goods abroad. Also note that Economic phenomena are not linear and one event doesn't necessarily or completely explain another. Everything is affected by everything else and hence the theories don't always work the way you expect them to as per what the book says. Also check out this video that discusses how to approach an RC passage: https://youtu.be/PtqSBl1D_wg

vanquisher · Answer

Why is there Classic only tag in this question?

Bunuel · Answer

It has the GMAT Prep (Classic only) tag because the question comes from the older official GMAT mock tests. However, the concept tested is still part of the current GMAT syllabus, so the question remains relevant and useful for practice.

agrasan · Answer

Hi  KarishmaB   MartyMurray

2. According to the passage, which of the following resulted from foreign investment in the United States after 1979?

(A) An increase in real interest rates
(B) A decrease in the savings rate of certain other nations
(C) An increase in American investment abroad
(D) An increase in the price of American goods abroad
(E) A decrease in the price of domestic goods sold at home

When we say  "according to the passage" , we primarily mean what the  author  is saying and keep other point of views aside, right? 
 So here for this question 3, in para-3, the author says    "real interest rates may themselves influence swings in the savings and investment rates"   , thus, option A is not correct because it is reverse of what the author is saying.

Please let me know if my approach and elimination of (A) is wrong somewhere.

guddo · Answer

2. According to the passage, which of the following resulted from foreign investment in the United States after 1979?

The passage says that after 1979, high real interest rates attracted foreign capital into the United States. That inflow then made American goods more expensive abroad and foreign goods cheaper in the United States.  The key point  is that  foreign investment in the United States led to a rise in the price of domestic goods abroad .

(A) An increase in real interest rates

This is backwards. The passage says real interest rates shot up first, and then foreign investors poured capital into the United States.

(B) A decrease in the savings rate of certain other nations

The passage says nothing about savings rates in other nations.

(C) An increase in American investment abroad

This is not supported. The passage discusses foreign investment into the United States, not American investment abroad.

(D) An increase in the price of American goods abroad

This is correct. The passage explicitly says that after foreign investors poured capital into the United States, “the price of domestic goods increased prohibitively abroad.”

(E) A decrease in the price of domestic goods sold at home

This is the opposite of what the passage discusses. It says foreign-made goods became cheaper in the United States, not domestic goods.

Answer: (D)

Many economists believe that a high rate of business savings

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GMAT Reading Comprehension (RC) Questions

Many economists believe that a high rate of business savings

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