It is often said that high rates of inflation tend to diminish people

Question

It is often said that high rates of inflation tend to diminish people’s incentive to save and invest. This view must be incorrect, however, because people generally saved and invested more of their income in the 1970’s when inflation rates were high than they did in the 1980’s when inflation rates were low.

Of the following, the best criticism of the argument above is that it overlooks the possibility that

(A) all people do not respond in the same way to a given economic stimulus
(B) certain factors operating in the 1980’s but not in the 1970’s diminished people’s incentive to save and invest
(C) the population was larger in the 1980’s than it was in the 1970’s
(D) the proponents of the view cited would stand to gain if inflation rates become lower
(E) a factor that affects people's savings behavior in a certain way could affect people’s investment behavior quite differently

ID: 500296

DmitryFarberMPrep · Accepted Answer

varotkorn  All we need is for B to weaken the argument to some extent. If something happened in the 1980's to disincentivize savings and investment, then it's possible that the traditional view that inflation reduces this activity is still correct. This calls the author's conclusion into question.

Notice that we're told nothing about what happened BEFORE inflation spiked in the 70's. Perhaps investment levels were very high, then they dropped in the 1970's as a result of inflation, and then they dropped again in the 1980's in response to the other factors cited in B. I suppose this would mean that the new factors were a greater disincentive than inflation had been, but we don't need to ASSUME that this is the case. We just have to recognize that the information in B opens up this possibility.

GGMU · Answer

A all people do not respond in the same way to a given economic stimulus  wE are not concerned about people's response 
B certain factors operating in the 1980’s but not in the 1970’s diminished people’s incentive to save and invest  Looks good 
C the population was larger in the 1980’s than it was in the 1970’s  Population has nothing to do with savings and investments 
D the proponents of the view cited would stand to gain if inflation rates become lower  Out of scope 
E a factor that affects people's savings behavior in a certain way could affect people’s investment behavior quite differently  This is a generalization, can't be the answer

QuanVsVerb · Answer

Correlation vs Causation. Inflation rate may not be the only factor influencing people's saving and investment behaviour. Other factor may have caused inflation and influenced people's behaviour.

Argument commits this fault.

Baymax · Answer

It is often said that high rates of inflation tend to diminish people’s incentive to save and invest. This view must be incorrect, however, because people generally saved and invested more of their income in the 1970’s when inflation rates were high than they did in the 1980’s when inflation rates were low.

Of the following, the best criticism of the argument above is that it overlooks the possibility that

(D) the proponents of the view cited would stand to gain if inflation rates become lower

A all people do not respond in the same way to a given economic stimulus
B certain factors operating in the 1980’s but not in the 1970’s diminished people’s incentive to save and invest
C the population was larger in the 1980’s than it was in the 1970’s
D the proponents of the view cited would stand to gain if inflation rates become lower
E a factor that affects people's savings behavior in a certain way could affect people’s investment behavior quite differently

Situation
People generally saved and invested more in the 1970’s when inflation was high than in the 1980’s when inflation was low, despite the fact that it is commonly believed that high inflation discourages savings and investment.

Reasoning
Why does the observation about savings, investment, and inflation rates in the 1970’s and 1980’s not justify the conclusion that high inflation does not generally diminish people’s incentive to save and invest? The argument observes that over the course of two decades there was a positive rather than a negative correlation between inflation on the one hand and savings and investment on the other. It infers from this that high rates of inflation do not tend to diminish people’s incentive to save and invest. Is this inference justified? Note that the claim that this argument is trying to discredit is not that high rates of inflation always diminished people’s incentive to save and invest. Rather, the claim is merely that high rates of inflation tend to do this. The argument overlooks the possibility that during the two decades in question other factors may have caused a positive correlation to briefly appear even if in general the correlation is negative.

A The argument is compatible with the hypothesis that some people respond to inflation by saving and investing more, while others do not. 
B  Correct.  If these other factors, unrelated to the inflation rate, that operated in the 1980’s but not the 1970’s, created an even greater disincentive to savings and investment than high inflation rates provide, then those trends do not provide evidence about the general relationship among savings, investment, and inflation. 
C The argument appears to concern savings and investment per capita, so total population size should be irrelevant. But increasing population would not explain declining total amounts of savings and investment, either.
D If anything, the possibility that the proponents’ ulterior motives distorted their reasoning would help to support the argument’s conclusion that the proponents’ view is incorrect.
E The argument addresses this possibility by presenting evidence that inflation was positively correlated with both savings and investment during the 1970’s and 1980’s.

shoumkrish · Answer

A all people do not respond in the same way to a given economic stimulus  We are not concerned about how people responded, rather we are interested in their investment strategy 
B certain factors operating in the 1980’s but not in the 1970’s diminished people’s incentive to save and invest  Correct. Could be the reason that there were other factors at play which affected the way the people behaved in a certain way in the 70s vs the 80s. 
C the population was larger in the 1980’s than it was in the 1970’s  we are not told about the proportion of the population who invested and saved in the 70s and 80s .
D the proponents of the view cited would stand to gain if inflation rates become lower  a wishful thinking. the argument says nothing about the views of the proponents of the idea 
E a factor that affects people's savings behavior in a certain way could affect people’s investment behavior quite differently  we are told nothing about the differences between investment and saving behavior.

CAMANISHPARMAR · Answer

Official Answer:

Argument Evaluation

Situation  People generally saved and invested more in the 1970's when inflation was high than in the 1980s when inflation was low, despite the fact that it is commonly believed that high inflation discourages savings and investment.

Reasoning  Why does the observation about savings, investment, and inflation rates in the 1970's and 1980's not justify the conclusion that high inflation does not generally diminish people's incentive to save and invest? The argument observes that over the course of two decades there was a positive rather than a negative correlation between inflation on the one hand and savings and investment on the other. It infers from this that high rates of inflation do not tend to diminish people's incentive to save and invest. Is this inference justified? Note that the claim that this argument is trying to discredit is not that high rates of inflation always diminished people's incentive to save and invest. Rather, the claim is merely that high rates of inflation tend to do this. The argument overlooks the possibility that during the two decades in question other factors may have caused a positive correlation to briefly appear even if in general the correlation is negative.

Option A is incorrect because The argument is compatible with the hypothesis that some people respond to inflation by saving and investing more, while others do not.

Option B is Correct.  If these other factors, unrelated to the inflation rate, that operated in the 1980's but not the 1970's, created an even greater disincentive to savings and investment than high inflation rates provide, then those trends do not provide evidence about the general relationship among savings, investment, and inflation.

Option C is incorrect because The argument appears to concern savings and investment per capita, so total population size should be irrelevant. But increasing population would not explain declining total amounts of savings and investment, either.

Option D is incorrect because If anything, the possibility that the proponents' ulterior motives distorted their reasoning would help to support the argument's conclusion that the proponents' view is incorrect.

Option E is incorrect because The argument addresses this possibility by presenting evidence that inflation was positively correlated with both savings and investment during the 1970's and 1980's.

kornn · Answer

Dear AjiteshArun VeritasKarishma DmitryFarber,

I have one question on the correct choice B.
(B) certain factors operating in the 1980’s but not in the 1970’s diminished people’s incentive to save and invest

In order to arrive at choice B., do we need to assume that those certain factos in 1980's had to OUTWEIGH the high inflation rates in 1970's ?
In other words, we have to assume that those factors in 1980's had to disincentivize MORE than the high inflation rates in 1970's disincentivized right?
I think that choice B. works under quite specific circumstances. That's why I am not 100% confident in selecting choice B.

Thank you in advance Sir!

Varot

adkikani · Answer

VeritasKarishma   MentorTutoring   GMATNinjaTwo

Could you assist to help me understand question stem better:
 
I understand that to criticize means to weaken.
How do I interpret:  it overlooks the possibility

AndrewN · Answer

Hello,  adkikani . Thank you for tagging me. The question is asking what the argument  does not consider  or  leaves out  that would make it most vulnerable to criticism. To overlook something is not to see it.

I hope that helps. If not, I can add some examples.

- Andrew

adkikani · Answer

Thank you  MentorTutoring

Understood. I guess that was a fancy phrase for: the argument is susceptible to criticism that ___
(In other words., how can I weaken the claim?)

AndrewN · Answer

Precisely,  adkikani . Of the five answers, which one draws attention to a logical flaw in the argument? There are only so many ways to express that notion. I think placing the question under the  weaken  umbrella or family of CR questions is good enough. Once you cut through the intimidation factor of GMAT™ questions, you can get to work and get something done.

- Andrew

Sneha2021 · Answer

AndrewN

Can you please help me to understand the meaning of D?
(D) the proponents of the view cited would stand to gain if inflation rates become lower

Thanks in advance!

AndrewN · Answer

Sure,  Sneha2021 . How about we look at the passage and answer choice for reference?

Since the second line starts with  this view , we can deduce that the view in question is that  high rates of inflation tend to diminish people's incentive to save and invest . Further,  the view cited  in answer choice (D) must be the same view. A  proponent  is someone who supports something. Finally,  stand to gain  most likely refers to some financial gain, given the context of the answer choice. Altogether, then, we can reasonably interpret answer choice (D) in the following manner (I will  underline  any alterations):

supporters  of the view  that high rates of inflation tend to diminish people's incentive to save and invest  would stand to gain  financially  if inflation rates become lower

Even though this statement is lengthier than the original answer choice, perhaps it clarifies matters a bit more. (If not, feel free to follow up.) Thank you for thinking to ask.

- Andrew

woohoo921 · Answer

A few questions on this one after reading the expert replies:
-For B, out of curiosity, what would be examples of certain factors? Normally the Official Guide's answers give hypothetical reasons to further your understanding
-I read Andrew's explanation of what D is trying to say but am also quite confused still. Any further clarify on what D is conveying and why D is incorrect would be greatly appreciated.

RonTargetTestPrep · Answer

E.g., if unemployment is high, the proportion of the population that will reasonably be able to "save and invest"—regardless of whether conditions such as inflation are good—is going to be lower than otherwise.

Choice D seems to be pointing out a conflict of interest. According to choice D, any argument  against  HIGH inflation is suspicious if it comes from somebody who has a personal stake in LOW inflation.

This type of thing isn't relevant here, though, because this argument is about   historical   rates of inflation and savings/investment. Regardless of whether someone has a conflict of interest in the present, she/he can't go back and personally affect arguments about phenomena that were observed decades in the past.

desertEagle · Answer

Option E : a factor that affects people's savings behavior in a certain way could affect people's investment behavior quite differently

Official explanation for option E:
E. The argument addresses this possibility by presenting evidence that inflation was positively correlated with both savings and investment during the 1970’s and 1980’s.

The arguments discusses the relation between  inflation  and ( saving and investment ). But the option discusses relation between  saving  and  investment. I n fact the option says that  savings  and  investment  can be inversely correlated. ​Whereas the argument says that the savings and investment will either increase or decrease in unison as the inflation increases or decreases respectively.

​​Kindly explain how  this possibility has been addressed.

DmitryFarberMPrep · Answer

Notice that the original argument does not differentiate between levels of saving and levels of investing. It just says that people "saved and invested more." In other words, the total S+I was a higher % of income in the 70s than in the 80s. This could be true whether people mostly saved and didn't invest, or vice versa. Since the author's argument doesn't rely on any distinction or comparison between the two activities, it's not affected by E.

VerbalBot · Answer

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It is often said that high rates of inflation tend to diminish people

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