V10-11

Question

The currency of Country A has been strengthening against other worldwide currencies for the past year. This occurs when demand for the currency outpaces its supply and is reversed when there is more supply than demand. Simultaneously, economists have noted a rapid growth in worldwide demand for products manufactured in Country A. This increase in product demand means more buyers need Country A's currency to make purchases, thereby driving up its demand. Therefore, economists conclude that the strengthening of Country A’s currency is a result of classic supply and demand factors.
 
Which of the following is an assumption made by the economists in reaching their conclusion?

A. It is not difficult to ship products made in Country A to other countries
B. Country A has lower manufacturing costs than other markets
C. The demand for products manufactured in Country A has been increasing
D. Country A has a regulatory system that ensures its manufactured products meet high quality standards
E. Manufacturing companies in Country A receive payment in Country A’s local currency

bb · Answer

Official Solution:

The currency of Country A has been strengthening against other worldwide currencies for the past year. This occurs when demand for the currency outpaces its supply and is reversed when there is more supply than demand. Simultaneously, economists have noted a rapid growth in worldwide demand for products manufactured in Country A. This increase in product demand means more buyers need Country A's currency to make purchases, thereby driving up its demand. Therefore, economists conclude that the strengthening of Country A’s currency is a result of classic supply and demand factors.
 
Which of the following is an assumption made by the economists in reaching their conclusion?

A. It is not difficult to ship products made in Country A to other countries
B. Country A has lower manufacturing costs than other markets
C. The demand for products manufactured in Country A has been increasing
D. Country A has a regulatory system that ensures its manufactured products meet high quality standards
E. Manufacturing companies in Country A receive payment in Country A’s local currency

General Approach
 
When approaching GMAT Critical Reasoning questions, it's important to first understand the argument that's being made. Identify the conclusion, evidence, and any assumptions that are being made. In this case, the conclusion is that Country A’s currency is strengthening because of classic supply and demand factors. The evidence is that the currency has been strengthening and demand for Country A's products has been rapidly growing. Once the argument is understood, examine each answer choice and ask: If this statement weren't true, would the argument fall apart? The correct answer will be the statement that the argument relies on.
 
Correct Answer
 
E) Manufacturing companies in Country A receive payment in Country A’s local currency. This is an assumption that underpins the economists' argument. If manufacturers in Country A did not require payment in the local currency, the rising demand for Country A's goods wouldn't necessarily lead to a strengthening of the currency. This statement has to be true for the argument to hold, which is why it's the correct answer.
 
Incorrect Answers
 
A) The difficulty of shipping products from Country A to other countries is irrelevant because the economists' argument is based on the demand for products from Country A, not the feasibility of delivering these products.
 
B) Lower manufacturing costs in Country A might contribute to a rise in demand for its products, but it's not a necessary condition for the economists' argument to be valid. The argument is based on an observed increase in demand, not on the reasons why this demand might be increasing.
 
C) The demand for products from Country A has been increasing is a premise and a fact mentioned in the passage. This is not an unstated assumption and any assumption that is stated is a fact. Assumption can be simple but it cannot be stated.
 
D) The quality of Country A's regulatory system is also irrelevant to the economists' argument. The argument is based on an observed increase in demand, which could occur regardless of the quality standards of Country A's products.

Answer: E

Sneha Jaiswal · Answer

Hi bb, thanks for the question. The question demands prior knowledge of how the trade and currency valuation are related. I took a different approach of understanding that 'demand and supply has led to increase in the currency value' and 'the international demand has been high' is explicitly given as a premise. So the assumption could only be that Country A has been able to successfully supply to the demand. So anything related to the ease of supply could be considered. Hence chose A.

. Probably A is irrelevant because if we negate the statement, i.e., If shipping is difficult, still supply could be made through difficult routes. Also, 'the classic demand and supply' seems to refer to demand and supply of products manufactured in the country and not the currency. Payment made in any currency would increase the country's reserves to strengthens its currency. Pls correct me if I m wrong.

Nightfury14 · Answer

Hi sneha I had the same query as yours when i first attempted this question. Moreover, me too was on the verge of dropping a post on similar lines. It seems you joined gmatclub recently and i assume that you are in the preliminary stage of preperation. So a small piece of advice. In the question above, The currency of Country A has been strengthening against other worldwide currencies for the past year, - the question specifically starts by discussing about currency of country A. You may call this a premise or Intermediate conclusion . and economists have observed that the worldwide demand for products manufactured in Country A has been rapidly growing. - a premise aka additional information. Thus, the economists reason that Country A’s currency is strengthening because of classic supply and demand factors. - the conclusion. Also keep the main conclusion's aim in the back of the mind when reading thru the choices. The whole argument is revolving around country's A Currency. So keep a eye open for any option which refers to the same. You shall find this beneficial especially in the sub-600 and 600-700 range of questions. Hope its clear. Now the reason i underlined intermediate conclusion, consider the following argument - "Economists have observed that the worldwide demand for products manufactured in Country A has been rapidly growing. They reason that Country A’s currency is strengthening because of classic supply and demand factors. Thus it can be concluded that the currency of Country A has been strengthening against other worldwide currencies for the past year." Re-read the answers. :idea:

Sneha Jaiswal · Answer

Hi Nightfury, Thanks for the reply. Its quite funny but I have my GMAT in 1 week.

Regarding the question, I wouldnt categorise the 1st statement ( The currency of Country A has been strengthening against other worldwide currencies for the past year, ) as an intermediate conclusion but as a fact or evidence (which cannot be disputed). ICs by the author can be disputed. I get your point of looking for main subject in the choices but the correct answer choice here says that payment in the same currency creates demand for the currency and hence brings in more currency. This increase in currency in the country is again assumed to strengthen the currency against other currencies. Isnt this possible even if the payment is in any other currency. I am sorry it might be silly but I am quite unaware of all this. Kindly explain. Thanks for your patience and help in advance.

sayantanc2k · Answer

The jump from  demand of a currency going high  to  currency getting stronger  needs some outside knowledge. We are withdrawing this question for further review.

bb · Answer

Thank you for bringing this up to our attention. We have evaluated this question and though there are some arguments about currency supply demand being a more technical/economics related concept, it is still falling under the basic principle of supply and demand - the greater the demand, the higher the price. At this time we will keep this question in the active database.

Best Regards
BB

Best Regards
BB

sayantanc2k · Answer

Sneha Jaiswal

After our internal discussions, it was agreed by our team (including myself, on second thoughts) that the law of supply and demand is a basic concept that a business school aspirant is expected to understand.

So, in response to your query, following is the explanation:
If the medium of purchase for country A's goods is the the currency of country A, then more the purchase, more is the currency required in the world market. In other words, more of country A's currency is required in the world market and hence the demand of country A'S currency would be increasing in the world market. As per supply and demand law, higher the demand, higher is the price. So the price of the currency of country A would go high. In other words more currency in other country's terms is required to buy country A's currency - i.e., country A's currency is strengthened.

amit771 · Answer

Hi All,

Please take my understanding into consideration -

Like if i think " it's a cause and effect scenario " . Here because of classic supply and demand factors led to strengthening Country A's Currency " so here we can pretty well assume that 
1. Nothing apart from Supply and demand led to strengthening of Country A's Currency ( Assuming because of cause and effect relation)

why I am doubting option " E" is that some other reason apart from "Supply and demand" has led to increase in strengthening of Country A's Currency . please explain on the lines of my understanding ??

Thanks 
Amit

PreiteeRanjan · Answer

This question is a  compare type  assumption qn

understand carefully

step-1  conclusion is non other than supply chain relation caused this hike in country-a's value. 
step-2 falsify the statement,that is"no no something other than S&C caused it."  
step-3 The problem is ,its easy to say something else caused,but what exactly caused is the actual talent to find assumption.so ask your self that what other thing is given as a clue,such as country-A currency,supply chain ,and the third one is other country's currency and its value. 
step-4 always try to find something new out of the box using a clue that the author is trying to avoid you to find,i:e other country currency value.and that is your game changer. 
step-5 now also you wont find the flasification statement is such kind of qn ,bit tricky,unless you are spending lots of time or cheating to gain something as revert.straight go the answer choice and fing which answer choice deals with the other currency . 
step-6 option-e tells you something related to the demand of supplier of country-A's currency.so now its time for you after getting confused in all the above options to think that is thier something going to happen with this statement.the answer will be yes ,obvious answer is you have to pay money in thier currency mode ,so alternatively your currency value will get down with increasing demand of country-A'S product. 
step-7 now you negate the statement ,you will find that the conclusion will not hold true.

hope it may take long time ,but is the best remedy for any kind of assumption qn.but we need to apply it correctly.

RenanBragion · Answer

I think this is a  high-quality  question.

adityakaregamba · Answer

sayantanc2k 
 Bunuel   bb

Even if the country were taking the payment in other country currency, it would be adjusted according to the exchange rate. Right ?

For example I am exporting cotton out of USA and my cost of making cotton is 100 USD and I am exporting it at 120USD and exporting it to India obviously even if I take INR (Indian Currency) this will not give me 100 INR, they will adjust it for the conversion rate and then transfer the amount. Please correct me if I am wrong. I know we should be knowing the concept of supply and demand but option E no where related to supply demand concept.

bb · Answer

Correct. As you are a second or third person to bring this up, I have gone ahead and revised the passage to add details around how supply and demand for currencies works and how it would be impacted by manufacturing and sales. P.S. Also set a trap in answer choice C. Let's see if I get a lot of heat for it

V10-11

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