Conventional wisdom has it that large deficits in the United

[michail.palagaschwili]

Conventional wisdom has it that large deficits in the United States budget cause interest rates to rise. Two main arguments are given for this claim. According to the first, as the deficit increases, the government will borrow more to make up for the ensuing shortage of funds. Consequently, it is argued, if both the total supply of credit (money available for borrowing) and the amount of credit sought by nongovernment borrowers remain relatively stable, as is often supposed, then the price of credit (the interest rate) will increase. That this is so is suggested by the basic economic principle that if supplies of a commodity (here, credit) remain fixed and demand for that commodity increases, its price will also increase. The second argument supposes that the government will tend to finance its deficits by increasing the money supply with insufficient regard for whether there is enough room for economic growth to enable such an increase to occur without causing inflation. It is then argued that financiers will expect the deficit to cause inflation and will raise interest rates, anticipating that because of inflation the money they lend will be worth less when paid back.

Unfortunately for the first argument, it is unreasonable to assume that nongovernment borrowing and the supply of credit will remain relatively stable. Nongovernment borrowing sometimes decreases. When it does, increased government borrowing will not necessarily push up the total demand for credit. Alternatively, when credit availability increases, for example through greater foreign lending to the United States, then interest rates need not rise, even if both private and government borrowing increase.

The second argument is also problematic. Financing the deficit by increasing the money supply should cause inflation only when there is not enough room for economic growth. Currently, there is no reason to expect deficits to cause inflation. However, since many financiers believe that deficits ordinarily create inflation, then admittedly they will be inclined to raise interest rates to offset mistakenly anticipated inflation. This effect, however, is due to ignorance, not to the deficit itself, and could be lessened by educating financiers on this issue.

Which of the following best summarizes the central idea of the passage?

(A) A decrease in nongovernment borrowing or an increase in the availability of credit can eliminate or lessen the ill effects of increased borrowing by the government.
(B) Educating financiers about the true relationship between large federal deficits and high interest rates will make financiers less prone to raise interest rates in response to deficits.
(C) There is little support for the widely held belief that large federal deficits will create higher interest rates, as the main arguments given to defend this claim are flawed.
(D) When the government borrows money, demand for credit increases, typically creating higher interest rates unless special conditions such as decreased consumer spending arise.
(E) Given that most financiers believe in a cause-and-effect relationship between large deficits and high interest rates, it should be expected that financiers will raise interest rates.

It can be inferred from the passage that proponents of the second argument would most likely agree with which of the following statements?

(A) The United States government does not usually care whether or not inflation increases.
(B) People in the United States government generally know very little about economics.
(C) The United States government is sometimes careless in formulating its economic policies.
(D) The United States government sometimes relies too much on the easy availability of foreign credit.
(E) The United States government increases the money supply whenever there is enough room for growth to support the increase.

Which of the following claims concerning the United States government's financing of the deficit does the author make in discussing the second argument?

(A) The government will decrease the money supply in times when the government does not have a deficit to finance.
(B) The government finances its deficits by increasing the money supply whenever the economy is expanding.
(C) As long as the government finances the deficit by borrowing, nongovernment borrowers will pay higher interest rates.
(D) The only way for the government to finance its deficits is to increase the money supply without regard for whether such an increase would cause inflation.
(E) Inflation should be caused when the government finances the deficit by increasing the money supply only if there is not enough room for economic growth to support the increase.

The author uses the term "admittedly" (see highlighted text) in order to indicate that

(A) the second argument has some truth to it, though not for the reasons usually supposed
(B) the author has not been successful in attempting to point out inadequacies in the two arguments
(C) the thesis that large deficits directly cause interest rates to rise has strong support after all
(D) financiers should admit that they were wrong in thinking that large deficits will cause higher inflation rates
(E) financiers generally do not think that the author's criticisms of the second argument are worthy of consideration

This is a GMATprep question.

[RonPurewal]

...??

you haven't asked any actual questions here.

please post specifics about the issue(s) you're having with the problem(s).
what was your approach?
what did you understand?
what didn't you understand?
where did you get stuck?
did you try any alternate approaches?
etc.

thanks.

[michail.palagaschwili]

I had too many problems to state them here, while dealing with this passage. So I've posted this question to benefit others. And may be the discussions also help me to understand the questions and the passage better.

I'm new to the forum, and hope, that I've not violated forum rules for posting.

[RonPurewal]

I had too many problems to state them here, while dealing with this passage.

if this ^^ is literally true -- you had so many issues with this passage that you can't even type them all into a forum post -- then continuing to study this problem, at the moment, would be a complete waste of time.
...and a waste of the passage, too.

[RonPurewal]

think of it like a traffic light.
green light = completely understand
yellow light = mostly understand, but there are one or two sticking points
red light = mostly or entirely lost

you shouldn't waste your time studying "red-light" problems. again, that's a double waste -- a waste of time, and a waste of the problems themselves (which are a precious resource).

for skill-building, you should focus on the yellow-light problems.

for review, and for diversifying your skill set, you should focus on the green-light problems.

really, if what you wrote up there is actually true, it would be best for you to just leave this set alone, for a while, and come back to it when you've built your RC skill set up some more.

[JbhB682]

Had a question specifically on this one

A - eliminated because of too narrow scope
B - wrong because it relates to theory # 2 only
C - i eliminated this because of the word "little support" ...... My reading of the passage seems to me, there is widespread support for both theories, even though both theories have flaws
D - too detailed...cannot be the central idea

E hence i chose via POE

But the OA is C

Please let me know, where am i going wrong in this

-------------------------


1. Which of the following best summarizes the central idea of the passage?

A. A decrease in nongovernment borrowing or an increase in the availability of credit can eliminate or lessen the ill effects of increased borrowing by the government.

B. Educating financiers about the true relationship between large federal deficits and high interest rates will make financiers less prone to raise interest rates in response to deficits.

C. There is little support for the widely held belief that large federal deficits will create higher interest rates, as the main arguments given to defend this claim are flawed.

D. When the government borrows money, demand for credit increases, typically creating higher interest rates unless special conditions such as decreased consumer spending arise.

E. Given that most financiers believe in a cause-and-effect relationship between large deficits and high interest rates, it should be expected that financiers will raise interest rates

[Sage Pearce-Higgins]

The passage is concerned with describing and refuting the arguments put forward for the view that large deficits in the United States budget cause interest rates to rise. Paragraph 1 describes two arguments, paragraph 2 refutes the first one, and paragraph 3 refutes the second.

I think your misunderstanding is with the word 'support'. Answer C mentions that there is 'little support' for a certain idea. This doesn't mean support in the sense of the number of supporters. It means support in the sense of evidence or reasons to believe something. After all, answer C tells us that it is a 'widely held belief', implying that lots of people subscribe to that idea. The main point of the passage is that people are wrong to believe the idea.

Watch out for such key words in RC answer choices as 'support'. They tend to get repeated.

[JbhB682]

Hi Sage --

I re did this problem and i fell into the same trap ...it seem's like i keep thinking in terms of number of supporters

Any suggestions on how to avoid this error ?

Are there other verbs perhaps that are the same but when used in different context -- have a completely different meaning ?

[Sage Pearce-Higgins]

Perhaps taking note that the modifier 'little' is for uncountable nouns, and that we'd use 'fewer' to refer to things that can be counted, such as people.

I'm also seeing a pattern in some of your choices, relating to what I mentioned about the 'principle of charity' in another thread. I can imagine that you read answer choice C (There is little support for the widely held belief...) and thought - "that's a silly sentence, if the belief is widely held, then that means that it's got lots of support", taking an uncharitable interpretation of its meaning in order to try to show that the author is wrong. That kind of thinking is going to lead you into this kind of trap.

It's good to hear that you're re-doing problems, though.