Inflation has traditionally been viewed as a negative cycle for an eco

Question

Inflation has traditionally been viewed as a negative cycle for an economy, whereas deflation has been seen as a time for the economy to return to healthier price levels. In recent years, though, economists have begun to view low inflationary development over time as healthy for the modern economy, due to the fact that inflation signals growth of money supply and increased prices. These increased prices become increased value for businesses and eventually trickle down to consumers as employees. Although prices are actually higher, consumers have more liquidity and thus spend more, helping to balance the economy. Many economists believe that inflation can sustain an economy that is struggling with recession.

Which of the following may be inferred from statements made in the passage above?

(A) Modern economists would prefer a severe state of inflation over a severe state of deflation.

(B) Historically, cycles of deflation have signaled low economic growth, while cycles of inflation have signaled high economic growth.

(C) Inflation is good for an economy domestically, but an increase of money supply usually corresponds with lower exchange rates and decreased international value.

(D) While low rates of inflation can be of benefit to an economy, higher rates of inflation can have devastating effects on a healthy economy.

(E) Consumer prices are lower during deflation, but this does not help an economy in recession, because consumers have less liquidity and are thus spending less.

Bunuel · Answer

OFFICIAL EXPLANATION

Overview:

Question provides the student with information concerning the economic arguments about inflation and deflation. The author of the passage begins by noting that inflation is traditionally viewed in a negative light, with deflation traditionally seen as a period for the economy to find stable price levels. In recent years, however, economists have begun to argue in favor of inflation for economic growth, because inflation accompanies the growth of money supply. Prices might be higher than is considered normal or healthy for the economy, but higher prices usually signal higher incomes and more liquidity among consumers. The passage concludes with the comment that economists believe inflation to be valuable during a period of economic recession. The question then asks the student to select an answer choice that may be inferred from statements made in the passage.

The Correct Answer:

E Answer choice (E) offers the unstated contrast to inflation by indicating why deflation would not help an economy: prices might be lower, but so are incomes, leaving consumers with less liquidity and less opportunity to return money into the economy through spending. Answer choice (E) is correct.

The Incorrect Answer:

A Far from recommending or valuing severe inflation, economists—according to the passage—recommend “low inflationary levels.” Answer choice (A) contradicts statements that are made in the passage, so it is clearly not inferred. Answer choice (A), therefore, is incorrect.

B The author of the passage suggests that inflation has “traditionally” been viewed in the exact reverse of how they are viewed today. As a result, it cannot be inferred from the passage that inflation has historically been viewed as healthy, with deflation viewed as unhealthy. Answer choice (B) cannot be correct.

C Answer choice (C) offers information that might be perfectly true, but there is nothing in the passage to suggest it. As a result, answer choice (C) must be eliminated as irrelevant.

D Answer choice (D) is tempting, because the author does specifically mention the value of “low inflationary levels.” This would suggest that higher rates of inflation would not necessarily benefit an economy. At the same time, there is not enough information in the passage to suggest that higher rates of inflation can have devastating effects on a healthy economy. This assumes more than the passage implies, so answer choice (D) is incorrect.

unraveled · Answer

Inflation has traditionally been viewed as a negative cycle for an economy, whereas deflation has been seen as a time for the economy to return to healthier price levels.  In recent years, though, economists have begun to view low inflationary development over time as healthy for the modern economy , due to the fact that inflation signals growth of money supply and increased prices. These increased prices become increased value for businesses and eventually trickle down to consumers as employees.  Although prices are actually higher, consumers have more liquidity and thus spend more, helping to balance the economy. Many economists believe that inflation can sustain an economy that is struggling with recession.

Which of the following may be inferred from statements made in the passage above?

(A) Modern economists would  prefer  a  severe state  of inflation over a  severe state  of deflation. - WRONG. Preference is out of scope.

(B)  Historically , cycles of deflation have signaled low economic growth, while cycles of inflation have signaled high economic growth. - WRONG. The passage discusses recent developments plus historical details are not available.

(C) Inflation is good for an economy  domestically , but an increase of money supply usually corresponds with  lower exchange rates and decreased international value . - WRONG. Addl. info but irrelevant.

(D) While low rates of inflation can be of benefit to an economy,  higher rates of inflation  can have devastating effects on a healthy economy. - WRONG. May be true in reality but as per passage not inferable.

(E) Consumer prices are lower during deflation, but this does not help an economy in recession, because consumers have less liquidity and are thus spending less. - CORRECT. The last sentence is somewhat a conclusion which is based upon previous sentence. This choice elaborates the opposite, a logical reverse, of penultimate sentence and thus infereable.

Answer E.

CRACKGMATNUT · Answer

Hi  EducationAisle ,

I am facing some difficulty in understanding option E.

(E) Consumer prices are lower during deflation,    but this does not help an economy in recession   , because consumers have less liquidity and are thus spending less. As per me the underlined portion is too strong for an inference. If the option was: Consumer prices are lower during deflation and as result consumers have less liquidity and are thus spending less, It would have made much more sense. Can you help in understanding how we can infer from the given set of information that Low prices does nothing to help an economy in recession? There can be some X,Y,Z dependent factors associated with Low consumer prices which ultimately help an economy in recession, or even that Low prices are in balance with low money supply and this balance can still sustain recession, shouldn't there be too many assumption one has to make to infer that low price and low money supply when in balance does *not* help in recession?

EducationAisle · Answer

Hi Mayank, the argument states: Many economists believe that inflation can sustain an economy that is struggling with recession.

So, all said and done, the argument believes that inflation is the cure, during recession.

Given the context of the argument, it would not be unreasonable to conclude from this that deflation is  not  the cure, during recession. This is exactly what the portion you've   highlighted   mentions.

sayan640 · Answer

MartyMurray   KarishmaB  Why not option D ?

Posted from my mobile device

MartyMurray · Answer

Here's (D):

(D) While low rates of inflation can be of benefit to an economy, higher rates of inflation can have devastating effects on a healthy economy.

Let's compare that with what the passage says about inflation being negative for an economy:

Inflation has traditionally been viewed as a negative cycle for an economy, whereas deflation has been seen as a time for the economy to return to healthier price levels.

We see that there is a significant difference between what the passage indicates and what (D) says.

The passage indicates that inflation can be " a negative cycle  for an economy." (D) says that "higher rates of inflation can have  devastating effects  on a healthy economy."

Notice that there is a big difference between "a negative cycle for an economy" and "devastating effects on a healthy economy." After all, something could be negative without being "devastating."

For example, an increase in food prices could have a negative impact on a "healthy economy" without "devastating" it. The economy could slow down a little but remain healthy.

So, what (D) says about "devastating effects on a healthy economy" is not supported by what the passage says.

Inflation has traditionally been viewed as a negative cycle for an eco

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Inflation has traditionally been viewed as a negative cycle for an eco

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