* RC: Conventional wisdom has it that large deficits ....

[peter_griffin]

Passage :
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.

The question that stumped me

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.

My reasoning :
A - Contender seems OK
B - Out of scope makes a generalisation abt ppl in the US
C- Contender
D - Out , no talk abt over-reliance
E - (weak) Contender

E is a little weak bcos it states it like a general truth, but the passage provides the "current situation" in currently .

But really there is no info to show / prove that the govt does not care / is careless.
Hoping the staff can help me out here.

Thanks in Advance.

[RonPurewal]

hi,
what's the source of this problem? is it actually from the gmat prep software?
if so, please post a screenshot; the wording is a little weird. (among other things, it's not very typical of gmac to say that a government does or doesn't "care" about something.)

(A) The United States government does not usually care whether or not inflation increases.

not supported.
the people making argument #2 certainly believe that the government is less concerned about inflation than about financing its deficits, but that's not the same as saying that the government doesn't care about inflation.

as an analogy, if i care more about making extra money than about getting enough sleep, then that doesn't imply that i don't care about getting enough sleep -- just that it isn't my #1 priority.

(C) The United States government is sometimes careless in formulating its economic policies.

the proponents of argument #2 suppose that the government will enact policies, at least sometimes, with "insufficient regard" for the possibility of inflation. so this is the best-supported choice.

(E) The United States government increases the money supply whenever there is enough room for growth to support the increase.

the whole point of the second argument is that the government doesn't think about whether there's enough room for growth in this sense. so, no.

[ShashankB122]

The author uses the term "admittedly" (see highlighted text in 3rd passage) 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

OA: A

I chose C. Author uses the word admittedly in order to show strong relationship between phenomena ( Deficit causes higher interest rates) and financier's belief.

Please explain.

[RonPurewal]

choice C is explicitly contradicted in the text.

(C) the thesis that large deficits directly cause interest rates to rise has strong support after all

text says:
This effect, however, is due to ignorance, not to the deficit itself
... in other words, that's an explicit 'no' to "do deficits directly cause interest rates to rise?"

[ShashankB122]

Thanks Ron!!
Now i understand that "large deficit causes interest rate rise to rise just because financiers misinterpreted the whole thing". So 2nd argument has truth to it but cause for the given effect is something else (financiers perception).

[RonPurewal]

yes.

[JbhB682]

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.


Hi - the OA is C on this but i chose B

Following was what i was looking for after i read the passage re: what should the summary be

1) There is a common misconception regarding deficits causing inflation
2) Author refuted both arguments
3) Recommends financiers be re-educated

Could you please confirm why B is wrong ? (Following was my reason for picking B)

a). maybe /may be not but seems very very narrow ...eliminate
b) Ahha -- this is what i wrote down in point 3 above ...keep for now
c) . little support for the belief that deficits cause interest rates ? No there isn't ..In fact -- there is HUGE support for it which is why the author is recommending re-education.....eliminate
d) . Too narrow ...eliminate
e). Keep for now

Between B and E ....went with B because B seemed more broad ...E seemed narrower compared to B

[Sage Pearce-Higgins]

There are two tasks here: to see why answer B doesn't work, and to see why answer C does. Taking the first one, answer B applies only to the second argument and so only covers part of the passage. Taking the second one, I'd encourage you to think 'Well, the question mentions "a central idea", but the passage seems to have multiple ideas, namely, two arguments. What are the two arguments claiming? That people are wrong to think that "large deficits in the United States budget cause interest rates to rise" because the two arguments given have big problems.' If you notice that, and connect 'conventional wisdom' with 'widely held belief', then answer C might jump out more obviously.

c) . little support for the belief that deficits cause interest rates ? No there isn't ..In fact -- there is HUGE support for it which is why the author is recommending re-education.....eliminate

You've misinterpreted 'little support for the widely held belief'. Now, I know that "support" can mean 'number of people who support something', such as in a sports team. But it can also mean 'evidence or reasons to believe something'. If we take the first interpretation, answer C means 'not many people support the widely held belief' then it's self-contradictory. Since the answer choices must at least make sense (even if they're not the correct one), this interpretation cannot be correct and the answer must be referring to support as evidence.