Economist: Currently the interest rates that banks pay to borrow

Question

Economist: Currently the interest rates that banks pay to borrow are higher than the interest rates that they can receive for loans to large, financially strong companies. Banks will not currently lend to companies that are not financially strong, and total lending by banks to small and medium-sized companies is less than it was five years ago. So total bank lending to companies is less than it was five years ago.

The economist's conclusion follows logically if which one of the following is assumed?

(A) Banks will not lend money at interest rates that are lower than the interest rates they pay to borrow.

(B) Most small and medium-sized companies were financially stronger five years ago than they are now.

(C) Five years ago, some banks would lend to companies that were not financially strong.

(D) The interest rates that banks currently pay to borrow are higher than the rates they paid five years ago.

(E) The interest rates that small and medium-sized companies pay to borrow are higher than those paid by large, financially strong companies.

ShreyaG7 · Answer

@KarishmaB @bunuel Could you kindly provide the OE for this question?

snoopypop · Answer

Claim: “Total bank lending to companies is less than it was five years ago.”

Key evidence: “Total lending by banks to small and medium-sized companies is less than it was five years ago.”

Counterpoint: What if the current number of loans to large-sized companies is gigantic? It’s possible that total lending is the same as, if not greater than, it was five years ago.

Assumption: The total lending to large-sized companies today is not large enough to offset the decrease in total lending to small-and-medium-companies.

Quote:

(A) Banks will not lend money at interest rates that are lower than the interest rates they pay to borrow.

This links back to the paragraph’s first sentence: “Currently the interest rates that banks pay to borrow are higher than the interest rates that they can receive for loans to large, financially strong companies.” In other words, banks are lending money at interest rates that are lower than the interest rates they pay to borrow. If A) is true, then currently, banks are not lending money to large, financially strong companies. This matches the required assumption — The total lending to large-sized companies today is not large enough. (Note that we don’t need to account for large, financially-average-or-weak companies: “Banks will not currently lend to companies that are not financially strong.”)

Thus, A is correct.

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KarishmaB · Answer

The answer here is (A).

We need to pick an option, which if true, makes the conclusion follow.

Currently the interest rates that banks pay to borrow are higher than the interest rates that they can receive for loans to large, financially strong companies. Banks will not currently lend to companies that are not financially strong, and total lending by banks to small and medium-sized companies is less than it was five years ago. So total bank lending to companies is less than it was five years ago.

We need to make this follow: total bank lending to companies is less than it was five years ago.

We already know this: Currently, total lending by banks to small and medium-sized companies is less than what it was 5 years ago.
What about large companies? How do we know that banks are not lending much more to large companies now as compared with 5 years ago?

What does this statement tell us - Currently the interest rates that banks pay to borrow are higher than the interest rates that they can receive for loans to large, financially strong companies?
Does it say that banks are not lending to large companies? No. What do we need? Something that tells us that banks are lending less to large companies too.

Now if we add this info too: Banks will not lend money at interest rates that are lower than the interest rates they pay to borrow.

Now it makes sense that banks are not lending to large companies. Hence, we know that banks are not lending to large companies and are lending less than what they did 5 yrs ago to small and medium companies.

Then it stands to reason that they are lending less to companies than they were five years ago.

vibhorrokstar19 · Answer

Can someone please explain why not B

kumarvibhuti630 · Answer

Conclusion : Total bank lending to companies is less than it was five years ago

Premise 1:  Currently the interest rates that banks pay to borrow are higher than the interest rates that they can receive for loans to large, financially strong companies.  
 Premise 2: Banks will not currently lend to companies that are not financially strong, and total lending by banks to small and medium-sized companies is less than it was five years ago.

Understanding  : small_company_lending + medium_company_lending+ large_company_lending < What it was 5 years ago.
=> large_company_lending < What it was 5 years ago, follows as given for small and medium sized company.

(A) Explanation : 
From premise 1, considering this assumption, it holds true that bank are not lending to large company and hence lending will be less than 5 years ago.

(B) Explanation : Irrelevant, we already know that banks lend less to medium and small company than 5 years ago.

(C) Explanation : Irrelevant to the scope of the argument

(D) Explanation : Irrelevant to the scope of the argument

(E) Explanation : Irrelevant to the scope of the argument.

GMATQuizMaster · Answer

Hey,

Let's break down the structure:

Total bank lending = Lending to large, financially strong companies + Lending to small and medium-sized companies
 
 What we know: 
 
 Lending to small and medium-sized companies has decreased.  
 What we need for the conclusion: 
 
 For TOTAL lending to be down, lending to large, financially strong companies must NOT have increased enough to compensate for the drop in small/medium lending.
  
 Why Choice B is incorrect: 
Choice B might explain WHY lending to small and medium-sized companies decreased (they became weaker financially, so banks stopped lending to them). However, it completely ignores what happened to the other major component of total lending - loans to large, financially strong companies. Thus, it is incorrect.

Rickooreoisb · Answer

Step 1 — Structure (fast tags)
 Premises 
 
 Borrowing rate (banks pay)  >  lending rate to strong companies 
 Banks  won’t lend to weak companies  
 Lending to small/medium companies  ↓ vs 5 years ago   
 Conclusion 
 Total lending now < total lending 5 years ago 
 
Step 2 — Spot the gap
We only know:
 
 strong-company loans → unattractive now 
 weak-company loans → not happening 
 small/medium → down  
But to conclude  total lending decreased , we must assume:
 
Because if they  did  lend at a loss, they could still lend a lot → total might NOT fall.
So we must block that loophole.
 
Step 3 — Evaluate choices quickly
(A) ✅
 
 This closes the gap.
Meaning:
 
 lending to strong firms gives lower return than cost
 → banks  won’t lend 
 → strong-company lending drops too
 → plus small/medium already down
 →  total must fall   
This makes the conclusion logically necessary.
✔ Required assumption.
 
(B)
Talks about company strength 5 years ago.
 Irrelevant to whether lending volume fell. ❌
 
(C)
Some banks lent to weak companies 5 years ago.
 “Some” is weak and unnecessary. Conclusion doesn’t depend on it. ❌
 
(D)
Borrowing rates higher now than 5 years ago.
 Not required. Even if same, lending could still be lower. ❌
 
(E)
Small/medium pay higher rates.
 Doesn’t matter — banks already said they won’t lend to them. ❌

Economist: Currently the interest rates that banks pay to borrow

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Economist: Currently the interest rates that banks pay to borrow

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