Inspired by a wave of uncertainty about currencies in several emerging

Question

Project RC Butler 2020  -  Participate and win GMAT Club Tests.   
Passage # 85, Date: 13-May-2020
 This post is a part of Project RC Butler 2020 .  Click here for Details

Inspired by a wave of uncertainty about currencies in several emerging markets in recent years, many investment banks are beginning to market their versions o fa new investment tool designed to predict when a currency’s value will decline sharply. Many academics and economists have combined their efforts to create these “risk indicators” in order to predict when financial turmoil in a nascent capitalist market is forthcoming.

Creators of this new model define a currency crisis as a drop of at least 10 percent in a currency’s real value. Working with a list of all of the currency crises that have occurred within the past ten years, researchers suggest a number of market or economic variables that may have helped bring the crashes about. Such factors include a country’s exchange-rate overvaluation, slowing economic growth, or a rising debt burden. Statisticians then use sophisticated econometrics to look for relationships between these factors and the currency dips they may have caused.

Representatives of the International Monetary Fund (IMF) question whether these new models are any improvement over the techniques that are currently in place. The risk indicators, the IMF argues, are too dependent on the benefit of hindsight and cannot account for any new economic phenomena that may arise. The IMF has also accused some of the investment banks of “data mining,” whereby analysts configure the information they cull from various sources until they finally verify the conclusion they have conditioned themselves to seek.

Further skepticism has been fueled by a comparison study of the risk indicator models, which was convened by Andrew Berg and Catherine Pattillo, a pair of IMF economists. After funneling economic data through each of the three most prominent models, Berg and Pattillo determined that none would have accurately predicted Asia’s currency freefall that began when Thailand’s baht was dislodged from its American dollar standard in July 1997. In fact, two models would have sounded a more severe alarm toward the Philippines, which has not undergone a currency crisis, than for either South Korea or Thailand, whose respective recoveries may never be complete.   1 
 1. The passage is chiefly concerned with 
 
A. warning that attempting to predict currencies fluctuations is a useless enterprise
B. advocating the indispensable role of the IMF in stabilizing the currencies of countries to which capitalism is relatively new
C. expressing doubts as to the reliability of some new attempts to predict financial phenomena
D. contrasting new and sophisticated financial models with older methods that are more concerned with careful research
E. recommending that better investor models be created before one isolated contagion leads to worldwide recession

2 
 2. Which of the following does the passage suggest about South Korea? 
 
A. It has received financial consultation and support from the IMF.
B. Its currency recently devalued by more than 10 percent.
C. Its economy is currently growing slower than that of the Philippines.
D. The new risk indicators would have detected its economic downturn had they been in place several years ago.
E. Its currency is closely tied to the American dollar.

3 
 3. Which of the following, if it happened soon after this article was published, would undermine the skepticism toward the viability of the “risk indicator” models? 
 
A. The value of the Filipino peso plummeted.
B. Berg and Pattillo resigned from the IMF.
C. The South Korean economy showed signs of slowing down further.
D. Thailand restored its connection to the American dollar.
E. The IMF changed its definition of a currency crisis to an 8 percent drop in value.

(14)

Gladiator59 · Accepted Answer

4 mins to all correct. A good read.

1. The passage is chiefly concerned with
A. warning that attempting to predict currencies fluctuations is a useless enterprise Too severe as the IMF only warns for inaccuracy in the new models suggested at the start but does not state that the effort is a "useless enterprise"
B. advocating the indispensable role of the IMF in stabilizing the currencies of countries to which capitalism is relatively new Not the point being discussed. Out of scope.
C. expressing doubts as to the reliability of some new attempts to predict financial phenomena Perfect. The passage starts with describing new models (new attempts) for predicting the crash of foreign currency (financial phenomenon) and ends with IMF showing the inaccuracy ( and hence doubts) in those new models.
D. contrasting new and sophisticated financial models with older methods that are more concerned with careful research TRAP - Not the point of the passages. A means to an end. So this cannot be the main point. Discard.
E. recommending that better investor models be created before one isolated contagion leads to worldwide recession The IMF stops just short of such a recommendation and the main bulk of the passage deals with the inaccuracies of the new models. Tangential at best.

Tricky one as the passage was probably written around 1997 and there is no mention of this fact. However, when the passage talks about new studies with respect to the 1997 crash of Thailand's currency - we can make this assumption.
2. Which of the following does the passage suggest about South Korea?
A. It has received financial consultation and support from the IMF. Out of scope.
B. Its currency recently devalued by more than 10 percent. Perfect - keeping the caveat above in mind.
C. Its economy is currently growing slower than that of the Philippines. Again, the economy didn't crash the value of the currency did. And even if the two are related to a crashed economy does not necessarily grow slower (it could grow faster if there was a recovery) so this cannot be inferred.
D. The new risk indicators would have detected its economic downturn had they been in place several years ago. 180 opposite of what is being suggested in the passage.
E. Its currency is closely tied to the American dollar. Again, this is speculative as there is no direct mention of South Korea's currency but that of Thailand's.

The IMF uses the fact that the models suggested Philippines currency would crash but it did not as a weakness of the model - so to go against that claim, if the currency did in fact crash - maybe the model is not that weak afterall.
3. Which of the following, if it happened soon after this article was published, would undermine the skepticism toward the viability of the “risk indicator” models?
A. The value of the Filipino peso plummeted. Perfect - a sweet question with a direct answer.
B. Berg and Pattillo resigned from the IMF. Out of scope.
C. The South Korean economy showed signs of slowing down further. Again, opposite of what the model predicted so does not work.
D. Thailand restored its connection to the American dollar. Again, discard for same reason as above.
E. The IMF changed its definition of a currency crisis to an 8 percent drop in value. IMF definiton has got nothing to do with the model. Discard.

Hope the answers are helpful.

dabaobao · Answer

Easy Passage! Took 6 min in total including 3:15 min to read the passage.

Passage Map: 
1) Tool to predict
2) Model, Variables, Factors
3) Tool any good? 2 Issues
4) Skepticism about the tool. Comparison of tools

varun325 · Answer

Total Time Taken : 8 minutes & 3/3 correct

PARA 1:
Investment banks, worried about fluctuation in the currencies of developing nations, planed to create a tool that can predict the currencie value. Economists created risk tools for the same purpose.

PARA2:
WHAT IS CURRENCY CRISIS? A-10% FALL OF CURRENCY.Now researchers studied the trend of the past 10 years and suggested three things that can help predict crisis.

PARA 3:
Now IMF comes in action and it doubts the viabilty of the plan citing the reason that it is dependent on previous year data.

PARA4: A & C , two economists from IMF, further does an study to prove that the tools are useless.Two example are cited in which the tools would have suggested inaccurately.

1. The passage is chiefly concerned with

A. warning that attempting to predict currencies fluctuations is a useless enterprise. Warnng is a strong word. Doubts are raised rather.
B. advocating the indispensable role of the IMF in stabilizing the currencies of countries to which capitalism is relatively new. IMF is only mentioned in one para & IMF just raised doubts on the viability of the tools nothing else.
 C. expressing doubts as to the reliability of some new attempts to predict financial phenomena( correct). Connect the dots of the passages and the result is this option choice. 
D. contrasting new and sophisticated financial models with older methods that are more concerned with careful research. No contrast given
E. recommending that better investor models be created before one isolated contagion leads to worldwide recession. Take a closer look nothing is recommended in the passage. The tools are not usefull.THATS IT

2. Which of the following does the passage suggest about South Korea?

A. It has received financial consultation and support from the IMF. Completely Incorrect 
IMF is in 3rd para while South Korea in 4th para.
 B. Its currency recently devalued by more than 10 percent. CORRECT Last para , In the example of philippines, It is stated that the tools would not have been able to predict the crisis of South Korea which is still recovering from the Economic disaster.  
C. Its economy is currently growing slower than that of the Philippines.No comparision SORRY INCORRECT
D. The new risk indicators would have detected its economic downturn had they been in place several years ago. No the risk indicators would not have indicated the crisis that occured in S.K.
E. Its currency is closely tied to the American dollar. NO WAY this is out of scope

3. Which of the following, if it happened soon after this article was published, would undermine the skepticism toward the viability of the “risk indicator” models?

A. The value of the Filipino peso plummeted.As per the study of B & P as mentioned in last para the tolls would have predicted an economic crisi in Philippines. ( CORRECT) 
B. Berg and Pattillo resigned from the IMF. This is funny ( Incorrect)
C. The South Korean economy showed signs of slowing down further. 
D. Thailand restored its connection to the American dollar.
E. The IMF changed its definition of a currency crisis to an 8 percent drop in value. ( Doesnt matter whether 8% or 10% on the viability of tools.

SiffyB · Answer

Took a total of 4 minutes 9 second and got 3/3 correct.
 
(02:57)
 1. The passage is chiefly concerned with
 
A. warning that attempting to predict currencies fluctuations is a useless enterprise
B. advocating the indispensable role of the IMF in stabilizing the currencies of countries to which capitalism is relatively new
  C. expressing doubts as to the reliability of some new attempts to predict financial phenomena 
 D. contrasting new and sophisticated financial models with older methods that are more concerned with careful research
E. recommending that better investor models be created before one isolated contagion leads to worldwide recession

This is a very straightforward question with easy choices to eliminate. The passage starts off by introducing a new method that can predict the currency fluctuations on the basis on historical data, among other factors. The information about IMF being skeptical about this method is given and the experiment done to further emphasize this suspicion is discussed. Clearly, the passage as a whole expresses doubt about the new model. This is discussed in option (C).

(00:28)
 2. Which of the following does the passage suggest about South Korea?
 
A. It has received financial consultation and support from the IMF.
  B. Its currency recently devalued by more than 10 percent. 
 C. Its economy is currently growing slower than that of the Philippines.
D. The new risk indicators would have detected its economic downturn had they been in place several years ago.
E. Its currency is closely tied to the American dollar.

Note that the passage talks about South Korea in the fourth passage. From what is stated in the passage, I inferred that while Philippines did not undergo a currency crisis, South Korea and Thailand did. Now shift your attention to the second passage. 
When does a currency crisis happen?
When there is at least 10 percent drop in a currency’s real value. Thus, it can be inferred that South Korea's currency underwent at least 10% drop in value. 
Hope that helps!
 
(00:45)
 3. Which of the following, if it happened soon after this article was published, would undermine the skepticism toward the viability of the “risk indicator” models?
 
  A. The value of the Filipino peso plummeted. 
 B. Berg and Pattillo resigned from the IMF.
C. The South Korean economy showed signs of slowing down further.
D. Thailand restored its connection to the American dollar.
E. The IMF changed its definition of a currency crisis to an 8 percent drop in value.

The passage states that "two models would have sounded a more severe alarm toward the Philippines, which has not undergone a currency crisis'. What if the Philippines not undergo a currency crisis? That would definitely mean that the model predicted this coming. The skepticism towards these models would be undermined, right? This is stated in choice (A) - the correct option.

Adi88 · Answer

Here is how I read and analysed the passage. (7 Mins and all questions Correct). Words highlighted in "Red" means Key Words, in "Grey" means details,those I am allowed to rush through to skip, and in "Green" means structural word)

Inspired by a wave of uncertainty about currencies in several emerging markets in recent years, many  investment banks  are beginning to  market  their versions of a new  investment tool  designed to predict  when a currency’s value will decline sharply .  Many academics and economists have combined their efforts to create these “risk indicators” in order to predict when financial turmoil in a nascent capitalist market is forthcoming.

Notes : Inv Bnk ---> New Tool to Dec in Curr Val

Creators of this new model define a  currency crisis as a drop of at least 10 percent  in a currency’s real value. Working with a list of all of the currency crises that have occurred within the past ten years,  researchers suggest a number of market or economic variables  that may have helped bring the crashes about.  Such factors include a country’s exchange-rate overvaluation, slowing economic growth, or a rising debt burden. Statisticians then use sophisticated econometrics to look for relationships between these factors and the currency dips they may have caused.

Notes : Def of Crisis and Details

Representatives of the International Monetary Fund (IMF)  question  whether these  new models are any improvement  over the techniques that are currently in place.  The risk indicators, the IMF argues, are too dependent on the benefit of hindsight and cannot account for any new economic phenomena that may arise. The IMF has also accused some of the investment banks of “data mining,” whereby analysts configure the information they cull from various sources until they finally verify the conclusion they have conditioned themselves to seek.

Notes : IMF Criticize

Further   skepticism has been fueled  by a comparison study of the risk indicator models,  which was convened by Andrew Berg and Catherine Pattillo, a pair of IMF economists. After funneling economic data through each of the three most prominent models, Berg and Pattillo determined that none would have accurately predicted Asia’s currency freefall that began when Thailand’s baht was dislodged from its American dollar standard in July 1997. In fact, two models would have sounded a more severe alarm toward the Philippines, which has not undergone a currency crisis, than for either South Korea or Thailand, whose respective recoveries may never be complete.

Notes : Further Critic

jayarora · Answer

Summary: Para 1: Many IBs are coming up with a "conversion tool". Para 2: Causes of such a crash and how they are being used to predict it Para 3: IMF peeps are not too happy about this tool. Two drawbacks mentioned Para 4: Further criticism illustrated with a particular example Passage is concerned with presenting criticism about a tool 1. The passage is chiefly concerned with A. warning that attempting to predict currencies fluctuations is a useless enterprise B. advocating the indispensable role of the IMF in stabilizing the currencies of countries to which capitalism is relatively new C. expressing doubts as to the reliability of some new attempts to predict financial phenomena In line with our summary D. contrasting new and sophisticated financial models with older methods that are more concerned with careful research E. recommending that better investor models be created before one isolated contagion leads to worldwide recession 2. Which of the following does the passage suggest about South Korea? A. It has received financial consultation and support from the IMF. B. Its currency recently devalued by more than 10 percent. South Korea or Thailand, whose respective recoveries may never be complete Although I feel this choice is the best among 5, it is not 100 percent supported as we do not know if the devaluation was RECENT. Moreover this 10 percent definition comes from the creators of this tool (and not from the author) so once again I was not too happy choosing this one but other answer choices are outright incorrect. C. Its economy is currently growing slower than that of the Philippines. D. The new risk indicators would have detected its economic downturn had they been in place several years ago. E. Its currency is closely tied to the American dollar. 3. Which of the following, if it happened soon after this article was published, would undermine the skepticism toward the viability of the “risk indicator” models? A. The value of the Filipino peso plummeted. This was used as a skepticism against the models because it had not happened. If this event followed, then models would have made a right prediction

B. Berg and Pattillo resigned from the IMF. C. The South Korean economy showed signs of slowing down further. D. Thailand restored its connection to the American dollar. E. The IMF changed its definition of a currency crisis to an 8 percent drop in value.

Inspired by a wave of uncertainty about currencies in several emerging

Prep Toolkit

Top 5 GMAT Debrief Videos

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards

GMAT Reading Comprehension (RC) Questions

Inspired by a wave of uncertainty about currencies in several emerging

Prep Toolkit

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards