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Updated on: 09 Apr 2026, 08:59
Originally posted by AgarwalArpit20 on 31 May 2018, 20:25.
Last edited by Bunuel on 09 Apr 2026, 08:59, edited 5 times in total.
Last edited by Bunuel on 09 Apr 2026, 08:59, edited 5 times in total.
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Question 1
D
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
75%
(hard)
Question Stats:
39% (02:52) correct
61%
(02:51) wrong
based on 626
sessions
History
Date
Time
Result
Not Attempted Yet
Question 2
D
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
35%
(medium)
Question Stats:
55% (00:43) correct 45%
(00:45) wrong
based on 586
sessions
History
Date
Time
Result
Not Attempted Yet
Question 3
C
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
45%
(medium)
Question Stats:
51% (00:42) correct 49%
(00:35) wrong
based on 465
sessions
History
Date
Time
Result
Not Attempted Yet
What is the biggest lesson from the Great Depression? In my view, it is that monetary policy and the financial sector play a crucial role in economic development. One important component of the monetary policy is the financial market, more specifically the banking sector.
Why are financial markets and the banking sector so important? Banks fulfill a very important role in the economy by matching borrowers and lenders. When we deposit $100 in a bank, the bank keeps, at most, two to three dollars in its vaults (some of this is actually kept with the central bank), the remaining $98 or so are lent to a borrower.
Most businesses require loans for their normal operations. When the banking sector does not work properly, businesses cannot get loans and they have to curtail their production and lay off workers. As they curtail production, they demand fewer products from their suppliers and therefore their suppliers have to reduce their output and fire workers. If manufacturers cannot sell their goods because the firm downstream does not need as many products as before, they cannot generate enough revenue to repay their earlier loans. Businesses go bankrupt and banks experience further problems as their balance sheet deteriorates due to non performing loans. At this point, banks want to lend even less because of the uncertainty generated from bankruptcies. As they lend less, the vicious circle continues – with producers cutting production and firing workers. On top of this, depositors start worrying about their deposits because the non-performing loans have made some banks go belly up – your bank has lent out your money to borrowers who cannot return it. Depositors start withdrawing their cash and banks have even fewer possibilities for lending as they have to hoard cash in case there is a run on the bank. If the financial sector does not work, the real economy can go into a deadly spiral and shrink by 30 per cent as during the Great Depression.
One would have thought that this fact would be obvious to all the policy makers. However all the lessons from the Great Depression seem to have been lost within three-quarters of a century. It seems, to paraphrase Marc Bard, that politics (especially of the petty and partisan variety) eats policy for lunch seven days a week.
Why are financial markets and the banking sector so important? Banks fulfill a very important role in the economy by matching borrowers and lenders. When we deposit $100 in a bank, the bank keeps, at most, two to three dollars in its vaults (some of this is actually kept with the central bank), the remaining $98 or so are lent to a borrower.
Most businesses require loans for their normal operations. When the banking sector does not work properly, businesses cannot get loans and they have to curtail their production and lay off workers. As they curtail production, they demand fewer products from their suppliers and therefore their suppliers have to reduce their output and fire workers. If manufacturers cannot sell their goods because the firm downstream does not need as many products as before, they cannot generate enough revenue to repay their earlier loans. Businesses go bankrupt and banks experience further problems as their balance sheet deteriorates due to non performing loans. At this point, banks want to lend even less because of the uncertainty generated from bankruptcies. As they lend less, the vicious circle continues – with producers cutting production and firing workers. On top of this, depositors start worrying about their deposits because the non-performing loans have made some banks go belly up – your bank has lent out your money to borrowers who cannot return it. Depositors start withdrawing their cash and banks have even fewer possibilities for lending as they have to hoard cash in case there is a run on the bank. If the financial sector does not work, the real economy can go into a deadly spiral and shrink by 30 per cent as during the Great Depression.
One would have thought that this fact would be obvious to all the policy makers. However all the lessons from the Great Depression seem to have been lost within three-quarters of a century. It seems, to paraphrase Marc Bard, that politics (especially of the petty and partisan variety) eats policy for lunch seven days a week.
1. What is the main purpose of the author in writing the passage?
(A) To explain how banks and other financial institutions function
(B) To discuss the lessons learnt from the Great Depression
(C) To argue that banks and manufacturing businesses are interdependent
(D) To criticise a group of people for not learning from the lessons of the Great Depression
(E) To conclude that people give preference to politics over policies
(A) To explain how banks and other financial institutions function
(B) To discuss the lessons learnt from the Great Depression
(C) To argue that banks and manufacturing businesses are interdependent
(D) To criticise a group of people for not learning from the lessons of the Great Depression
(E) To conclude that people give preference to politics over policies
2. According to the information in the passage, which of the following can be inferred?
(A) Banks are short of cash most of the time
(B) Banks do not like to keep money with the central bank
(C) Banks do not like to keep large amounts of money in their vaults
(D) Banks usually keep some money with the central bank
(E) Banks actually fool the customers
(A) Banks are short of cash most of the time
(B) Banks do not like to keep money with the central bank
(C) Banks do not like to keep large amounts of money in their vaults
(D) Banks usually keep some money with the central bank
(E) Banks actually fool the customers
3. In the last paragraph, the tone of the author is
(A) Adulatory
(B) Optimistic
(C) Critical
(D) Analytical
(E) Ridiculing
(A) Adulatory
(B) Optimistic
(C) Critical
(D) Analytical
(E) Ridiculing
18 Mar 2019, 08:48
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Official Explanation
Topic – Role of the Monetary Policy
Scope - Discuss lessons from the Great Depression about the monetary policy and conclude that policymakers haven’t learnt from the same.
Passage Map
P1- to introduce the monetary policy and state that the banking sector is an important component of the same.
P2 and P3 - to describe why the banking sector is important and how the failure of the same can lead to a depression-like scenario.
P4 - to concludes that policymakers haven’t learnt from experience and that politics takes precedence over policy.
Scope - Discuss lessons from the Great Depression about the monetary policy and conclude that policymakers haven’t learnt from the same.
Passage Map
P1- to introduce the monetary policy and state that the banking sector is an important component of the same.
P2 and P3 - to describe why the banking sector is important and how the failure of the same can lead to a depression-like scenario.
P4 - to concludes that policymakers haven’t learnt from experience and that politics takes precedence over policy.
1. What is the main purpose of the author in writing the passage?
Explanation
The author starts off by describing how monetary policy works and the interdependence among its different players. He then goes on to conclude that policymakers have failed to learn from the lessons of the past as far as monetary policy is concerned. From this (D) follows as the best answer.
A. The author is doing much more than just this. This option fails to take into account the last paragraph.
B. Again the purpose is not just to describe the lessons but also to assert that policymakers haven’t learnt from these lessons.
C. Same as above, the purpose is broader than this.
E. This is true specifically for the policymakers but not for people in general.
ANSWER: D
Explanation
The author starts off by describing how monetary policy works and the interdependence among its different players. He then goes on to conclude that policymakers have failed to learn from the lessons of the past as far as monetary policy is concerned. From this (D) follows as the best answer.
A. The author is doing much more than just this. This option fails to take into account the last paragraph.
B. Again the purpose is not just to describe the lessons but also to assert that policymakers haven’t learnt from these lessons.
C. Same as above, the purpose is broader than this.
E. This is true specifically for the policymakers but not for people in general.
ANSWER: D
2. According to the information in the passage, which of the following can be inferred?
Explanation
(D) is the correct answer from the lines within brackets in the 2nd para.
A. Incorrect as it is neither mentioned nor can it be inferred from the paragraph.
B. Incorrect as the author doesn’t mention anything about whether banks like this or not.
C. A tricky one. While it is true from the 2nd paragraph that banks do not like to keep a large proportion of their funds within their vaults, the amount of money (in absolute terms) in their vaults could still be fairly large.
E. This is false as no such inference can be drawn from the passage.
ANSWER: D
Explanation
(D) is the correct answer from the lines within brackets in the 2nd para.
A. Incorrect as it is neither mentioned nor can it be inferred from the paragraph.
B. Incorrect as the author doesn’t mention anything about whether banks like this or not.
C. A tricky one. While it is true from the 2nd paragraph that banks do not like to keep a large proportion of their funds within their vaults, the amount of money (in absolute terms) in their vaults could still be fairly large.
E. This is false as no such inference can be drawn from the passage.
ANSWER: D
3. In the last paragraph, the tone of the author is
Explanation
(C) is the correct answer because the author is clearly criticizing the policy makers for not having learnt from the lessons of the Great Depression.
A. is incorrect as the author is not adulating or praising anyone in the last para.
B. is incorrect as the author is critical of the policy makers, so he is in fact closer to being pessimistic.
D. is incorrect as the author is opinionated and not analytical in the last para.
E. is incorrect as ‘ridiculing’ is a very strong term and the author doesn’t really ridicule or make fun of the policymakers.
ANSWER: C
Explanation
(C) is the correct answer because the author is clearly criticizing the policy makers for not having learnt from the lessons of the Great Depression.
A. is incorrect as the author is not adulating or praising anyone in the last para.
B. is incorrect as the author is critical of the policy makers, so he is in fact closer to being pessimistic.
D. is incorrect as the author is opinionated and not analytical in the last para.
E. is incorrect as ‘ridiculing’ is a very strong term and the author doesn’t really ridicule or make fun of the policymakers.
ANSWER: C
Hope it helps
01 Apr 2019, 10:43
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can any expert please provide convincing reasoning for the correct answer choices? Q3, in particular; why is E incorrect?
Thank you.
Thank you.
