Many policymakers in the United States claim that a high national

Question

‎ ‎ ‎ ‎ Many policymakers in the United States claim that a high national savings rate is a necessary precursor to a high investment rate by businesses. But despite the fact that households account for only one quarter of the total national savings (with businesses providing the balance), current economic policies are almost exclusively directed at increasing household savings. Such policies are deleterious because increased household savings result in reduced consumer buying, and the consequent loss of sales causes businesses to curtail investments in plants and equipment even when interest rates are low. An increase in business savings has the opposite effect: as businesses save more, they invest more in plants and equipment.

‎ ‎ ‎ ‎ The adverse effect of increased household savings on the business savings rate is suggested by data showing that an increase in household savings from 3 percent of the gross domestic product (GDP) in 1988 to 4 percent in 1991 accompanied a decline in sales that was concurrent with a decline in business savings from 13.2 percent to 11.7 percent of the GDP. The resulting decline in business investment and jobs ought to have convinced policymakers to abandon current policies and instead institute policies aimed at improving corporate profits, the primary source of business savings. Generally, as businesses profit and increase their investments, household incomes are also likely to increase.

1. According to the passage, which of the following accompanied the decline in sales mentioned in the highlighted text?

A. Higher interest rates
B. Reduced household incomes
C. Decreased household savings
D. Decreased business savings
E. Sluggish GDP growth

2. The passage suggests that which of the following is likely to contribute to an increase in household incomes?

A. Lower interest rates
B. A decrease in business investment
C. An increase in business savings
D. A decrease in consumer buying
E. A decrease in business profits

3. The author’s argument about current economic policy would most clearly be undermined if which of the following occurred?

A. Household incomes increased as business investment increased.
B. The business and the household savings rates each increased significantly.
C. The business savings rate grew, while the household savings rate declined.
D. Investment in plants and equipment doubled even though interest rates were high.
E. The household proportion of national savings remained constant, while total national savings declined.

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Show Answer Question #1

Official Answer

D

Show Answer Question #2

Official Answer

C

Show Answer Question #3

Official Answer

B

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aaronmart14 · Answer

The core logic:

- Claim: Policies that try to raise household saving are bad.

- Reasoning chain: Higher household saving → lower consumer spending → lower business sales → businesses cut investment and business saving (even if rates are low).

- Recommendation: Drop those policies and instead boost corporate profits (i.e., business saving), which raises investment and (typically) household income.

So the key assumption is a negative relationship: when household saving rises, business saving/investment fall.

3. The author’s argument about current economic policy would most clearly be undermined if which of the following occurred?

B. The business and the household savings rates each increased significantly.

If both household and business saving rise together, that contradicts the author’s core premise that higher household saving depresses business saving/investment. It shows they can move in the same direction, weakening the argument against policies that raise household saving.

Why not the others?

A. Supports the author (he already claims business investment tends to lift household incomes).

C. Fits the author’s story (business saving up while household saving down).

D. About interest rates; the author’s point doesn’t hinge on rates being high/low here.

E. Says total national saving fell with the household share constant—doesn’t touch the alleged causal harm of raising household saving.

Sajjad1994 · Answer

3. The author’s argument about current economic policy would most clearly be undermined if which of the following occurred?

Explanation

Main points of the passage:

National savings = household savings (25%) + business savings (75%). 
 Policymakers want high national savings ----> high investment. 
 But current policies only target household savings, ignoring business savings. 
 Increasing household savings ----> less consumer spending ----> lower sales ----> businesses invest less even if interest rates are low. 
 Increasing business savings ----> businesses invest more. 
 Data from 1988–1991: household savings goes up, business savings goes down, investment goes down. 
  Conclusion:  policymakers should instead aim to increase corporate profits (source of business savings) to boost investment.

So the author’s main criticism:  policies that increase household savings are counterproductive because they hurt business investment.  To undermine the argument , we need something that shows increasing household savings does not hurt business investment (or that the causal link is wrong).

The author’s key evidence:

When household savings went up, business savings & investment went down. Author interprets this as causal: higher household savings means lower business investment. If we could  show that both household savings and business savings can rise together  (contradicting the author’s causal story), that would undermine the claim that increasing household savings necessarily hurts business savings/investment.

A.  This is actually consistent with the last sentence of the argument. Doesn’t undermine.

B.   This directly contradicts the author’s view that they move in opposite directions due to the mechanism described. If both can rise significantly, then policies targeting household savings might not harm business savings. This would undermine the author’s reasoning.

C.  This is exactly what the author would predict from his own model (if household savings decline, consumer spending rises, helping business profits/savings). So it supports, not undermines.

D.  The author already says investment can be low even when interest rates are low, so high rates with high investment doesn’t directly contradict the household savings mechanism.

E.  This is irrelevant to the causal claim about household savings rise hurting business investment.

Answer: B

gullyboy09 · Answer

Hi  KarishmaB ,  chetan2u ,  MartyMurray ,  GMATNinja  can you help me with this question. Passage says "...and the consequent loss of sales causes businesses to curtail investments in plants and equipment even when interest rates are low." So even when conditions are feasible (low interest rate), investment in plants and equipments decrease. Now if we look at option D, even though interest rates are high (meaning not very feasible time to invest) investments in plants and equipment are doubled. So in current policy scenario author was saying even in low interest rate investments would be low, whereas D says in current scenario despite being high interest rate investments are doubled. So why not D ? I was confused between both B and D, and chose D eventually. And even if we dont take interest rate effect here, but if investment got double, it clearly undermines authors projection that in current scenario it will decrease.

3. The author’s argument about current economic policy would most clearly be undermined if which of the following occurred?

A. Household incomes increased as business investment increased.
B. The business and the household savings rates each increased significantly.
C. The business savings rate grew, while the household savings rate declined.
D. Investment in plants and equipment doubled even though interest rates were high.
E. The household proportion of national savings remained constant, while total national savings declined.

MartyMurray · Answer

The author's argument "about current economic policy" is that encouraging household saving has an adverse effect on business saving.

So, although the author mentions that this effect occurs "even when interest rates are low," the author's point is not about the effects of interest rates. It's about the effects of encouraging household savings.

In other words, the author's point is not that increases in interest rates have adverse effects on business investment. Rather, the author mentions what occurs when interest rates are low only to emphasize the author's point about the effect of encouraging household saving.

Thus, an increase in business investment in a high interest rate environment would not be counter to the author's argument, which is about the effects of household saving, not of interest rates.

gullyboy09 · Answer

Hi  MartyMurray , thanks for your response. But D still says investments got doubled, but author had expected that investments will decrease. So even if I ignore the interest rate part, in the current scenario investment got doubled, contrary to what author expected.

MartyMurray · Answer

Notice that the author never said that business investment would "decrease." Rather, the point is that encouraging household savings can cause businesses to "curtail" investment, meaning that, when household savings increase, businesses invest less than they would otherwise have invested.

Curtailed investment could still be increased investment. After all, businesses could increase their investments while not investing as much as they would have under different conditions.

Also, the way the question is asked indicates that the point of the correct answer is to present a scenario that, in general, undermines the author's argument. We aren't meant to assume that the situations presented by the answer choices occur under the conditions of current policy and to look for an answer that shows that that policy doesn't have the effects the author says it does.

For example, choice (C)  The business savings rate grew, while the household savings rate declined, certainly doesn't fit the author's opinion of the effects of current policy, but the existence of such a situation doesn't undermine the author's argument because, in general, such a situation is in line with the author's point.

guddo · Answer

3. The author’s argument about current economic policy would most clearly be undermined if which of the following occurred?

The author argues that policies encouraging household savings are harmful because greater household savings reduce consumer spending, which hurts business sales, savings, and investment.  The argument would therefore be undermined most directly by evidence that household savings can increase without hurting business savings.

(A) Household incomes increased as business investment increased.

Incorrect. This supports the author’s claim that  greater business investment can lead to higher household incomes .

(B) The business and the household savings rates each increased significantly.

Correct.   This most directly challenges the author’s claim that increased household savings have an adverse effect on business savings. If both household savings and business savings increased significantly, that would provide evidence against the claimed negative relationship between them.

(C) The business savings rate grew, while the household savings rate declined.

Incorrect. This is consistent with the author’s argument that lower household savings can be associated with stronger business savings.

(D) Investment in plants and equipment doubled even though interest rates were high.

Incorrect. The author’s argument is not that high interest rates prevent investment or that business investment must decline in absolute terms. The claim is that increased household savings cause businesses to invest less than they otherwise would. Even if investment doubled, it could still have been curtailed; without the effect of increased household savings, it might have increased even more. Moreover, (D) tells us nothing about household savings, so it does not directly challenge the relationship at the center of the argument.

(E) The household proportion of national savings remained constant, while total national savings declined.

Incorrect. This does not show whether increased household savings hurt business savings or investment.

Answer: (B)

Many policymakers in the United States claim that a high national

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Many policymakers in the United States claim that a high national

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