V32-12

Question

The causal relationship between economic growth and financial market development has been the subject of intensive theoretical and empirical studies. The question is whether financial market development produces economic growth or the arrow of causation points in the other direction.

The recent revival of interest in the link between financial development and growth stems mainly from the insights and techniques of internally originated growth models, which have shown that there can be self-sustaining growth without externally originated technical progress and that the growth rate can be related to preferences, technology, income distribution and institutional arrangements. This provides the theoretical underpinning that early contributors lacked: financial intermediation can be shown to have not only level effects but also growth effects.

Pagano suggests three ways in which, under the basic internally fueled growth model, the development of the financial sector might affect economic growth. First, it can increase the productivity of investments. Second, an efficient financial sector reduces transaction costs and thus increases the share of savings channeled into productive investments. (An efficient financial sector improves the liquidity of investments.) Third, financial sector development can either promote or reduce savings.

Which of the following best describes the function of (the 2nd sentence of the 2nd paragraph)?

A. To present the key finding of a recent study that investigated the causes of economic growth 
B. To summarize a new understanding of the effects of financial market development 
C. To show that growth can be self-sustaining without technical progress 
D. To reinforce the idea that financial intermediation has begun to have an upward effect on economic growth 
E. To introduce a controversial theory that the author will then provide evidence to support

souvik101990 · Answer

Official Solution:

The causal relationship between economic growth and financial market development has been the subject of intensive theoretical and empirical studies. The question is whether financial market development produces economic growth or the arrow of causation points in the other direction.

The recent revival of interest in the link between financial development and growth stems mainly from the insights and techniques of internally originated growth models, which have shown that there can be self-sustaining growth without externally originated technical progress and that the growth rate can be related to preferences, technology, income distribution and institutional arrangements. This provides the theoretical underpinning that early contributors lacked: financial intermediation can be shown to have not only level effects but also growth effects.

Pagano suggests three ways in which, under the basic internally fueled growth model, the development of the financial sector might affect economic growth. First, it can increase the productivity of investments. Second, an efficient financial sector reduces transaction costs and thus increases the share of savings channeled into productive investments. (An efficient financial sector improves the liquidity of investments.) Third, financial sector development can either promote or reduce savings.

Which of the following best describes the function of (the 2nd sentence of the 2nd paragraph)?

A. To present the key finding of a recent study that investigated the causes of economic growth 
B. To summarize a new understanding of the effects of financial market development 
C. To show that growth can be self-sustaining without technical progress 
D. To reinforce the idea that financial intermediation has begun to have an upward effect on economic growth 
E. To introduce a controversial theory that the author will then provide evidence to support

This is an Item Purpose question - What is the purpose of this particular sentence. This sentence says that there is now theoretical evidence to support an idea: financial intermediation (development) can have "growth effects," (referring to economic growth). This is a summary of the previous sentence, which refers, in greater detail, to research now being done on the causal connection between these two areas.

(A) There is no one "recent study" references in the passage.

(B) This is the correct choice. The "new understanding" is that financial intermediation (development) can have growth effects. This subject is then explored in the next paragraph, but the sentence itself does little more than summarize the basic idea.

(C) This sentence does little "showing." It also does not refer explicitly to "technical progress."

(D) The idea is not that this is a new effect, but that it is now better understood.

(E) This sentence does introduce a "theoretical framework," but this is not the same as a particular theory. Also, there is no mention of "controversy."

Answer: B

swim2109 · Answer

Summarizing jumps at me. Didnt choose because of the word summarizing

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