What is the biggest lesson from the Great Depression? In my view, it i

Question

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 
 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 
 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 
 3. In the last paragraph, the tone of the author is

(A) Adulatory
(B) Optimistic
(C) Critical
(D) Analytical
(E) Ridiculing

SajjitaKundu · Answer

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?
Please help!

KS15 · Answer

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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jackspire · Answer

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.

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

KS15 · Answer

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.

jackspire · Answer

Thanks for your comments.

soumya170293 · Answer

for Q -> 1, why is B not the OA ? 
Kindly explain the POE of B.

kawadhiya21 · Answer

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).

KS15 · Answer

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.

MithilaGauri · Answer

For Question 3 why is E wrong. In the last sentence, the author'stone is ridiculing?

Posted from my mobile device

MithilaGauri · Answer

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.

Posted from my mobile device

prashant6923 · Answer

Could anyone please provide insight on Q2?Why C is not correct?

Sajjad1994 · Answer

SajjitaKundu 
 KS15 
 jackspire 
 soumya170293 
 MithilaGauri 
 prashant6923 
 blueshores

I hope your doubts get cleared

Official Explanation

Topic     – Role of the Monetary Policy

Scope     - Discuss lessons from the Great Depression about the monetary policy and conclude that policymakers haven’t learnt from the same.

Passage Map

P1 - to introduce the monetary policy and state that the banking sector is an important component of the same.

P2 and P3  - to describe why the banking sector is important and how the failure of the same can lead to a depression-like scenario.

P4  - to concludes that policymakers haven’t learnt from experience and that politics takes precedence over policy.

1. What is the main purpose of the author in writing the passage?

Explanation

The author starts off by describing how monetary policy works and the interdependence among its different players. He then goes on to conclude that policymakers have failed to learn from the lessons of the past as far as monetary policy is concerned.  From this (D) follows as the best answer.

A.  The author is doing much more than just this. This option fails to take into account the last paragraph.
 B.  Again the purpose is not just to describe the lessons but also to assert that policymakers haven’t learnt from these lessons.
 C.  Same as above, the purpose is broader than this.
 E.  This is true specifically for the policymakers but not for people in general.

ANSWER: D

2. According to the information in the passage, which of the following can be inferred?

Explanation

(D) is the correct answer  from the lines within brackets in the 2nd para.

A.  Incorrect as it is neither mentioned nor can it be inferred from the paragraph.
 B.  Incorrect as the author doesn’t mention anything about whether banks like this or not.
 C.  A tricky one. While it is true from the 2nd paragraph that banks do not like to keep a large proportion of their funds within their vaults, the amount of money (in absolute terms) in their vaults could still be fairly large.
 E.  This is false as no such inference can be drawn from the passage.

ANSWER: D

3. In the last paragraph, the tone of the author is

Explanation

(C) is the correct answer  because the author is clearly criticizing the policy makers for not having learnt from the lessons of the Great Depression.

A.  is incorrect as the author is not adulating or praising anyone in the last para.
 B.  is incorrect as the author is critical of the policy makers, so he is in fact closer to being pessimistic.
 D.  is incorrect as the author is opinionated and not analytical in the last para.
 E.  is incorrect as ‘ridiculing’ is a very strong term and the author doesn’t really ridicule or make fun of the policymakers.

ANSWER: C

Hope it helps

shantanuvyas · Answer

can any expert please provide convincing reasoning for the correct answer choices? Q3, in particular; why is E incorrect?

Thank you.

TheNightKing · Answer

Firstly, with all due respect, there is a high chance majority of us would have encountered this word in option E for the first time.
If you Google it, the meaning of "Ridiculing" is subject (someone or something) to contemptuous and dismissive language or behavior.
Now obviously we did not know the meaning but the closest word you can think of is ridiculous (or at least I could think of). Now do you really fee author is actually that extreme?

Now coming to option C, Author is being Critical. Yes. Why? Because you have to understand what's his/her point? Even though he is being sarcastic in the end he has shown concern towards Great Depression and is even more critical towards what could happen (this is an inference). Hence C is a better choice.

shantanuvyas  I guess it's too delayed a response but thought to give it a shot

TheNightKing · Answer

Extremely nice passage with great questions.!
Managed to get all 3 questions right. Q1: 2m20s. Q2: 30sec Q3: 30 Sec.

Please understand you don't need to read paragraph 3 to it's length. You get the point that author is explaining how bank/economy/jobs work. Just skim and come back if the need be.

+1 to you Sir.

KalpeshKulkarni · Answer

According to me the answer should contain both of B and D. since entire passage is dedicated to how this works and still lesson hasnt been learnt by policy makers..

VerbalBot · Answer

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What is the biggest lesson from the Great Depression? In my view, it i

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