Official Solution:The causal relationship between economic growth and financial market development has been the subject of intensive theoretical and empirical studies. The question is whether financial market development produces economic growth or the arrow of causation points in the other direction.
The recent revival of interest in the link between financial development and growth stems mainly from the insights and techniques of internally originated growth models, which have shown that there can be self-sustaining growth without externally originated technical progress and that the growth rate can be related to preferences, technology, income distribution and institutional arrangements. This provides the theoretical underpinning that early contributors lacked: financial intermediation can be shown to have not only level effects but also growth effects.
Pagano suggests three ways in which, under the basic internally fueled growth model, the development of the financial sector might affect economic growth. First, it can increase the productivity of investments. Second, an efficient financial sector reduces transaction costs and thus increases the share of savings channeled into productive investments. (An efficient financial sector improves the liquidity of investments.) Third, financial sector development can either promote or reduce savings. The primary purpose of the passage is to A. show the underlying assumptions of a new line of reasoning
B. illustrate the principles that guide a field of research
C. encourage further study of a connection between two related topics
D. introduce the basic substance of a topic in which there has been renewed interest
E. list the various methods used to analyze causal relationships that were unrecognized until recently.
Here we have our classic Passage Purpose question. The primary purpose of the passage will be a statement that summarizes the author's intention in writing the passage.
(A) Though the relationship between economic development and financial growth could be broadly thought of as a "line of reasoning," there is no focus on "assumptions."
(B) There is virtually no illustration, no descriptive material in the passage. The passage does little more than introduce a topic.
(C) The author's tone is not "encouraging." There is no sense of what the author "wants." Rather, the tone is neutral, simply introducing an area of interest.
(D) This is the correct choice. The author presents the topic in the first sentence: The causal relationship between economic growth and financial market development. The author makes clear in the second paragraph that interest in this topic is "recent." The third paragraph gives a few basic details, but does not elaborate on them, though this might be what the author does next.
(E) The third paragraph does present a list, but not a list of "methods." Furthermore, it would be unlikely for the passage's primary purpose to not become evident until the third paragraph.
Answer: D
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