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By the early twentieth century, the gold standard had become a cornerstone of the international financial system. Under this arrangement, currencies were convertible into a fixed quantity of gold, anchoring exchange rates and constraining governments from expanding the money supply beyond their reserves. The system’s defenders regarded this rigidity as a safeguard against political interference and fiscal irresponsibility. In their view, the discipline imposed by gold convertibility maintained both domestic price stability and global confidence, even if it limited short-term flexibility.
That discipline proved costly during the Great Depression. When economic activity contracted sharply after 1929, central banks faced mounting pressure to cut interest rates and inject liquidity. Yet countries that remained tied to gold hesitated to act, fearing depletion of reserves and loss of credibility. The result was a deflationary spiral that deepened unemployment and curtailed investment. Nations that abandoned gold earlier, notably Britain in 1931, recovered more quickly than those that persisted, including France and the United States. What had once been a symbol of prudence came to be viewed as an obstacle to recovery.
The reasons for that persistence remain debated. Some historians attribute it to ideological commitment- an unwillingness to relinquish what was seen as the foundation of monetary order. Others emphasize practical concerns: policymakers feared that floating exchange rates would invite competitive devaluations and international discord. Whatever the motive, adherence to the gold standard transmitted economic distress across borders, transforming local recessions into a global depression.
The system’s collapse in the 1930s marked a decisive turning point in economic thought. Governments grew more willing to use monetary and fiscal tools to stabilize demand, while economists questioned whether automatic monetary rules could ever accommodate large shocks. Still, the appeal of fixed standards has endured. Periodic calls for a return to monetary discipline reflect an unresolved tension in economic policy- the search for stability through constraint versus the need for flexibility in crisis.
In the first paragraph, the author’s reference to individuals having “complete information and consistent preferences” serves primarily to
A. foreshadow the gap between the ideal of perfect knowledge and the imperfect information people actually possess in real-world decisions.
B. state the core premises of traditional rational-choice economics, establishing a foundation for the discussion that follows.
C. illustrate how behavioral economists redefine utility to account for emotional influences.
D. introduce an idealized benchmark whose purpose is to be contrasted subsequently with the cognitive biases Kahneman and Tversky document.
E. suggest that neoclassical economists misunderstood how preferences are formed and maintained.
That discipline proved costly during the Great Depression. When economic activity contracted sharply after 1929, central banks faced mounting pressure to cut interest rates and inject liquidity. Yet countries that remained tied to gold hesitated to act, fearing depletion of reserves and loss of credibility. The result was a deflationary spiral that deepened unemployment and curtailed investment. Nations that abandoned gold earlier, notably Britain in 1931, recovered more quickly than those that persisted, including France and the United States. What had once been a symbol of prudence came to be viewed as an obstacle to recovery.
The reasons for that persistence remain debated. Some historians attribute it to ideological commitment- an unwillingness to relinquish what was seen as the foundation of monetary order. Others emphasize practical concerns: policymakers feared that floating exchange rates would invite competitive devaluations and international discord. Whatever the motive, adherence to the gold standard transmitted economic distress across borders, transforming local recessions into a global depression.
The system’s collapse in the 1930s marked a decisive turning point in economic thought. Governments grew more willing to use monetary and fiscal tools to stabilize demand, while economists questioned whether automatic monetary rules could ever accommodate large shocks. Still, the appeal of fixed standards has endured. Periodic calls for a return to monetary discipline reflect an unresolved tension in economic policy- the search for stability through constraint versus the need for flexibility in crisis.
In the first paragraph, the author’s reference to individuals having “complete information and consistent preferences” serves primarily to
A. foreshadow the gap between the ideal of perfect knowledge and the imperfect information people actually possess in real-world decisions.
B. state the core premises of traditional rational-choice economics, establishing a foundation for the discussion that follows.
C. illustrate how behavioral economists redefine utility to account for emotional influences.
D. introduce an idealized benchmark whose purpose is to be contrasted subsequently with the cognitive biases Kahneman and Tversky document.
E. suggest that neoclassical economists misunderstood how preferences are formed and maintained.
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Official Solution:
By the early twentieth century, the gold standard had become a cornerstone of the international financial system. Under this arrangement, currencies were convertible into a fixed quantity of gold, anchoring exchange rates and constraining governments from expanding the money supply beyond their reserves. The system’s defenders regarded this rigidity as a safeguard against political interference and fiscal irresponsibility. In their view, the discipline imposed by gold convertibility maintained both domestic price stability and global confidence, even if it limited short-term flexibility.
That discipline proved costly during the Great Depression. When economic activity contracted sharply after 1929, central banks faced mounting pressure to cut interest rates and inject liquidity. Yet countries that remained tied to gold hesitated to act, fearing depletion of reserves and loss of credibility. The result was a deflationary spiral that deepened unemployment and curtailed investment. Nations that abandoned gold earlier, notably Britain in 1931, recovered more quickly than those that persisted, including France and the United States. What had once been a symbol of prudence came to be viewed as an obstacle to recovery.
The reasons for that persistence remain debated. Some historians attribute it to ideological commitment- an unwillingness to relinquish what was seen as the foundation of monetary order. Others emphasize practical concerns: policymakers feared that floating exchange rates would invite competitive devaluations and international discord. Whatever the motive, adherence to the gold standard transmitted economic distress across borders, transforming local recessions into a global depression.
The system’s collapse in the 1930s marked a decisive turning point in economic thought. Governments grew more willing to use monetary and fiscal tools to stabilize demand, while economists questioned whether automatic monetary rules could ever accommodate large shocks. Still, the appeal of fixed standards has endured. Periodic calls for a return to monetary discipline reflect an unresolved tension in economic policy- the search for stability through constraint versus the need for flexibility in crisis.
In the first paragraph, the author’s reference to individuals having “complete information and consistent preferences” serves primarily to
A. foreshadow the gap between the ideal of perfect knowledge and the imperfect information people actually possess in real-world decisions.
B. state the core premises of traditional rational-choice economics, establishing a foundation for the discussion that follows.
C. illustrate how behavioral economists redefine utility to account for emotional influences.
D. introduce an idealized benchmark whose purpose is to be contrasted subsequently with the cognitive biases Kahneman and Tversky document.
E. suggest that neoclassical economists misunderstood how preferences are formed and maintained.
A) Incorrect. The idea of perfect knowledge does point toward the later examples of real-world limits, yet that is a side effect. The author first wants readers to know the two things older economists took for granted: full facts and steady tastes. Foreshadowing comes later, so this option misses the main purpose.
B) Correct. The sentence lists “complete information” and “consistent preferences” to spell out the basic rules of the traditional model. These two rules are the ground on which the rest of the passage stands. Once they are clear, the author can show how new research questions them. Laying that groundwork is the sentence’s primary job.
C) Incorrect. Utility that includes emotion is part of the newer, behavioral view, but the phrase we are asked about belongs to the older view. It does not mention feelings or a new way to measure utility, so this choice does not fit.
D) Incorrect. Later on, the author does set the old rules against biases like framing and loss aversion. Even so, the first step is to state those old rules so readers know what will be tested. The contrast is important, yet it happens after the definition, not at the same moment. Because the option puts the contrast first, it overstates that role.
E) Incorrect. Nothing in the passage says early economists failed to understand how preferences form. The author only says they assumed preferences stay stable. The phrase is a neutral description of their starting point, not a claim of misunderstanding.
Answer: B
By the early twentieth century, the gold standard had become a cornerstone of the international financial system. Under this arrangement, currencies were convertible into a fixed quantity of gold, anchoring exchange rates and constraining governments from expanding the money supply beyond their reserves. The system’s defenders regarded this rigidity as a safeguard against political interference and fiscal irresponsibility. In their view, the discipline imposed by gold convertibility maintained both domestic price stability and global confidence, even if it limited short-term flexibility.
That discipline proved costly during the Great Depression. When economic activity contracted sharply after 1929, central banks faced mounting pressure to cut interest rates and inject liquidity. Yet countries that remained tied to gold hesitated to act, fearing depletion of reserves and loss of credibility. The result was a deflationary spiral that deepened unemployment and curtailed investment. Nations that abandoned gold earlier, notably Britain in 1931, recovered more quickly than those that persisted, including France and the United States. What had once been a symbol of prudence came to be viewed as an obstacle to recovery.
The reasons for that persistence remain debated. Some historians attribute it to ideological commitment- an unwillingness to relinquish what was seen as the foundation of monetary order. Others emphasize practical concerns: policymakers feared that floating exchange rates would invite competitive devaluations and international discord. Whatever the motive, adherence to the gold standard transmitted economic distress across borders, transforming local recessions into a global depression.
The system’s collapse in the 1930s marked a decisive turning point in economic thought. Governments grew more willing to use monetary and fiscal tools to stabilize demand, while economists questioned whether automatic monetary rules could ever accommodate large shocks. Still, the appeal of fixed standards has endured. Periodic calls for a return to monetary discipline reflect an unresolved tension in economic policy- the search for stability through constraint versus the need for flexibility in crisis.
In the first paragraph, the author’s reference to individuals having “complete information and consistent preferences” serves primarily to
A. foreshadow the gap between the ideal of perfect knowledge and the imperfect information people actually possess in real-world decisions.
B. state the core premises of traditional rational-choice economics, establishing a foundation for the discussion that follows.
C. illustrate how behavioral economists redefine utility to account for emotional influences.
D. introduce an idealized benchmark whose purpose is to be contrasted subsequently with the cognitive biases Kahneman and Tversky document.
E. suggest that neoclassical economists misunderstood how preferences are formed and maintained.
A) Incorrect. The idea of perfect knowledge does point toward the later examples of real-world limits, yet that is a side effect. The author first wants readers to know the two things older economists took for granted: full facts and steady tastes. Foreshadowing comes later, so this option misses the main purpose.
B) Correct. The sentence lists “complete information” and “consistent preferences” to spell out the basic rules of the traditional model. These two rules are the ground on which the rest of the passage stands. Once they are clear, the author can show how new research questions them. Laying that groundwork is the sentence’s primary job.
C) Incorrect. Utility that includes emotion is part of the newer, behavioral view, but the phrase we are asked about belongs to the older view. It does not mention feelings or a new way to measure utility, so this choice does not fit.
D) Incorrect. Later on, the author does set the old rules against biases like framing and loss aversion. Even so, the first step is to state those old rules so readers know what will be tested. The contrast is important, yet it happens after the definition, not at the same moment. Because the option puts the contrast first, it overstates that role.
E) Incorrect. Nothing in the passage says early economists failed to understand how preferences form. The author only says they assumed preferences stay stable. The phrase is a neutral description of their starting point, not a claim of misunderstanding.
Answer: B
