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# What is the biggest lesson from the Great Depression?

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Manager
Joined: 08 Jan 2018
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Concentration: Finance, Technology
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What is the biggest lesson from the Great Depression?  [#permalink]

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Updated on: 18 Aug 2018, 23:01
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Question 3
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What is the biggest lesson from the Great Depression? In my view, it is that monetary policy and the financial sector play a crucial role in economic development. One important component of the monetary policy is the financial market, more specifically the banking sector.

Why are financial markets and the banking sector so important? Banks fulfill a very important role in the economy by matching borrowers and lenders. When we deposit \$100 in a bank, the bank keeps, at most, two to three dollars in its vaults (some of this is actually kept with the central bank), the remaining \$98 or so are lent to a borrower.

Most businesses require loans for their normal operations. When the banking sector does not work properly, businesses cannot get loans and they have to curtail their production and lay off workers. As they curtail production, they demand fewer products from their suppliers and therefore their suppliers have to reduce their output and fire workers. If manufacturers cannot sell their goods because the firm downstream does not need as many products as before, they cannot generate enough revenue to repay their earlier loans. Businesses go bankrupt and banks experience further problems as their balance sheet deteriorates due to non performing loans. At this point, banks want to lend even less because of the uncertainty generated from bankruptcies. As they lend less, the vicious circle continues – with producers cutting production and firing workers. On top of this, depositors start worrying about their deposits because the non-performing loans have made some banks go belly up – your bank has lent out your money to borrowers who cannot return it. Depositors start withdrawing their cash and banks have even fewer possibilities for lending as they have to hoard cash in case there is a run on the bank. If the financial sector does not work, the real economy can go into a deadly spiral and shrink by 30 per cent as during the Great Depression.

One would have thought that this fact would be obvious to all the policy makers. However all the lessons from the Great Depression seem to have been lost within three-quarters of a century. It seems, to paraphrase Marc Bard, that politics (especially of the petty and partisan variety) eats policy for lunch seven days a week.
1. What is the main purpose of the author in writing the passage?
(A) To explain how banks and other financial institutions function
(B) To discuss the lessons learnt from the Great Depression
(C) To argue that banks and manufacturing businesses are interdependent
(D) To criticise a group of people for not learning from the lessons of the Great Depression
(E) To conclude that people give preference to politics over policies

2. According to the information in the passage, which of the following can be inferred?
(A) Banks are short of cash most of the time
(B) Banks do not like to keep money with the central bank
(C) Banks do not like to keep large amounts of money in their vaults
(D) Banks usually keep some money with the central bank
(E) Banks actually fool the customers

3. In the last paragraph, the tone of the author is
(B) Optimistic
(C) Critical
(D) Analytical
(E) Ridiculing

Originally posted by aanyajain20 on 31 May 2018, 19:25.
Last edited by workout on 18 Aug 2018, 23:01, edited 1 time in total.
Formatted
Manager
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Re: What is the biggest lesson from the Great Depression?  [#permalink]

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31 May 2018, 20:12
Hi Experts,

My answers were A/D/C. But for question 1, the answer provided is D. Isn't D just present at the end of the passage? How can it be the entire purpose of the passage?
Director
Joined: 21 May 2013
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Re: What is the biggest lesson from the Great Depression?  [#permalink]

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01 Jun 2018, 06:44
The answer to Qs 3 can both be C and E. I see that the tone is critical but just read the last sentence of the RC-you can clearly infer that the tone of the author is sarcastic/ridiculing.
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Re: What is the biggest lesson from the Great Depression?  [#permalink]

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01 Jun 2018, 06:58
For question 2, why option C is not correct. As per the passage, it's written that out of \$100 of someone's deposit only \$2 is kept in vaults. So why can't we infer that Banks do not like to keep large amounts of money in their vaults?

For question 3, why "analytical" is not correct.
Director
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Re: What is the biggest lesson from the Great Depression?  [#permalink]

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01 Jun 2018, 07:22
jackspire wrote:
For question 2, why option C is not correct. As per the passage, it's written that out of \$100 of someone's deposit only \$2 is kept in vaults. So why can't we infer that Banks do not like to keep large amounts of money in their vaults?

For question 3, why "analytical" is not correct.

Qs2: C is not correct as the RC says"When we deposit \$100 in a bank, the bank keeps, at most,
two to three dollars in its vaults (some of this is actually kept with the central bank), the remaining \$98 or
so are lent to a borrower."-This is only valid for every \$100. Think about the billions of dollars that banks have-in such a scenario 2 to 3% of billions will still be in millions-hence this can be eliminated.

Qs3. One would have thought that this fact would be obvious to all the policy makers. However all the lessons
from the Great Depression seem to have been lost within three-quarters of a century. It seems, to
paraphrase Marc Bard, that politics (especially of the petty and partisan variety) eats policy for lunch
seven days a week: This tone is not analytical-he is coming to a conclusion by being critical of the approach that policy makers have taken-they have not learnt their lessons.Also, he talks in a ridiculing manner in the last sentence. So it boils down to C and E. Experts can probably tell how to eliminate E.
Manager
Joined: 22 Sep 2017
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Re: What is the biggest lesson from the Great Depression?  [#permalink]

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01 Jun 2018, 08:41
KS15 wrote:
jackspire wrote:
For question 2, why option C is not correct. As per the passage, it's written that out of \$100 of someone's deposit only \$2 is kept in vaults. So why can't we infer that Banks do not like to keep large amounts of money in their vaults?

For question 3, why "analytical" is not correct.

Qs2: C is not correct as the RC says"When we deposit \$100 in a bank, the bank keeps, at most,
two to three dollars in its vaults (some of this is actually kept with the central bank), the remaining \$98 or
so are lent to a borrower."-This is only valid for every \$100. Think about the billions of dollars that banks have-in such a scenario 2 to 3% of billions will still be in millions-hence this can be eliminated.

Qs3. One would have thought that this fact would be obvious to all the policy makers. However all the lessons
from the Great Depression seem to have been lost within three-quarters of a century. It seems, to
paraphrase Marc Bard, that politics (especially of the petty and partisan variety) eats policy for lunch
seven days a week: This tone is not analytical-he is coming to a conclusion by being critical of the approach that policy makers have taken-they have not learnt their lessons.Also, he talks in a ridiculing manner in the last sentence. So it boils down to C and E. Experts can probably tell how to eliminate E.

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Re: What is the biggest lesson from the Great Depression?  [#permalink]

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03 Jun 2018, 22:56
for Q -> 1, why is B not the OA ?
Kindly explain the POE of B.
Intern
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Schools: ISB '20 (S)
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Re: What is the biggest lesson from the Great Depression?  [#permalink]

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18 Aug 2018, 10:45
KS15 wrote:
jackspire wrote:
For question 2, why option C is not correct. As per the passage, it's written that out of \$100 of someone's deposit only \$2 is kept in vaults. So why can't we infer that Banks do not like to keep large amounts of money in their vaults?

For question 3, why "analytical" is not correct.

Qs2: C is not correct as the RC says"When we deposit \$100 in a bank, the bank keeps, at most,
two to three dollars in its vaults (some of this is actually kept with the central bank), the remaining \$98 or
so are lent to a borrower."-This is only valid for every \$100. Think about the billions of dollars that banks have-in such a scenario 2 to 3% of billions will still be in millions-hence this can be eliminated.

Qs3. One would have thought that this fact would be obvious to all the policy makers. However all the lessons
from the Great Depression seem to have been lost within three-quarters of a century. It seems, to
paraphrase Marc Bard, that politics (especially of the petty and partisan variety) eats policy for lunch
seven days a week: This tone is not analytical-he is coming to a conclusion by being critical of the approach that policy makers have taken-they have not learnt their lessons.Also, he talks in a ridiculing manner in the last sentence. So it boils down to C and E. Experts can probably tell how to eliminate E.

This explanation doesn't make sense. When said that banks lend \$98 out of \$100 deposited, it is just an example which tells that 98% of money is lent. It doesn't matter whether actual amount is in billions or trillions. Comparison is between what is kept in the vault and how much is lent. The amount lent is, as inferred, preferably much more than what is kept in vault.

Explanation for this option is when industries start defaulting on loans. In that case, banks prefer to keep money in vaults to avoid losing the depositor's money and this is the only case when banks do not prefer lending money. The only thing which holds true is money kept at Central Bank. That fact never changes no matter what state economy is in (as mentioned in passage).
Director
Joined: 21 May 2013
Posts: 660
Re: What is the biggest lesson from the Great Depression?  [#permalink]

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18 Aug 2018, 22:58
KS15 wrote:
jackspire wrote:
For question 2, why option C is not correct. As per the passage, it's written that out of \$100 of someone's deposit only \$2 is kept in vaults. So why can't we infer that Banks do not like to keep large amounts of money in their vaults?

For question 3, why "analytical" is not correct.

Qs2: C is not correct as the RC says"When we deposit \$100 in a bank, the bank keeps, at most,
two to three dollars in its vaults (some of this is actually kept with the central bank), the remaining \$98 or
so are lent to a borrower."-This is only valid for every \$100. Think about the billions of dollars that banks have-in such a scenario 2 to 3% of billions will still be in millions-hence this can be eliminated.

Qs3. One would have thought that this fact would be obvious to all the policy makers. However all the lessons
from the Great Depression seem to have been lost within three-quarters of a century. It seems, to
paraphrase Marc Bard, that politics (especially of the petty and partisan variety) eats policy for lunch
seven days a week: This tone is not analytical-he is coming to a conclusion by being critical of the approach that policy makers have taken-they have not learnt their lessons.Also, he talks in a ridiculing manner in the last sentence. So it boils down to C and E. Experts can probably tell how to eliminate E.

This explanation doesn't make sense. When said that banks lend \$98 out of \$100 deposited, it is just an example which tells that 98% of money is lent. It doesn't matter whether actual amount is in billions or trillions. Comparison is between what is kept in the vault and how much is lent. The amount lent is, as inferred, preferably much more than what is kept in vault.

Explanation for this option is when industries start defaulting on loans. In that case, banks prefer to keep money in vaults to avoid losing the depositor's money and this is the only case when banks do not prefer lending money. The only thing which holds true is money kept at Central Bank. That fact never changes no matter what state economy is in (as mentioned in passage).

The explanation does make sense. If you read carefully what I have written and also the RC, clearly what the RC means is out of every \$100 deposited, \$98 is lent. So it not just an example. It is the % or ratio of money that is deposited and lent. This also includes some of which is kept in the central banks. And, YES, you have to prorate the amount to billions since banks dont deal in thousands or lakhs.
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Re: What is the biggest lesson from the Great Depression?  [#permalink]

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18 Aug 2018, 23:16
For Question 3 why is E wrong. In the last sentence, the author'stone is ridiculing?

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Intern
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Re: What is the biggest lesson from the Great Depression?  [#permalink]

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18 Aug 2018, 23:24
In question 1 why is E not correct. The passage states that politicians intentionally prefer politics to policies. This is stated in the last line.

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Manager
Joined: 21 Jul 2012
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Re: What is the biggest lesson from the Great Depression?  [#permalink]

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19 Aug 2018, 22:58
Could anyone please provide insight on Q2?Why C is not correct?
Re: What is the biggest lesson from the Great Depression?   [#permalink] 19 Aug 2018, 22:58
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