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100 points for $49 worth of Veritas practice GMATs FREE VERITAS PRACTICE GMAT EXAMS Earn 10 Points Per Post Earn 10 Points Per Thanks Earn 10 Points Per Upvote ## Bank Depositors (GMAT Prep) tagged by: ##### This topic has 2 expert replies and 10 member replies ## Bank Depositors (GMAT Prep) Bank depositors in the United States are all financially protected against bank failure because the government insures all individuals' bank deposits. An economist argues that this insurance is partly responsible for the high rate of bank failures, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money. The economist's argument makes which of the following assumptions? (A) Bank failures are caused when big borrowers default on loan repayments. (B) A significant proportion of depositors maintain accounts at several different banks. (C) The more a depositor has to deposit, the more careful he or she tends to be in selecting a bank. (D) The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures. (E) Potential depositors are able to determine which banks are secure against failure. OA E Can you explain why B is incorrect and E is right. ### GMAT/MBA Expert GMAT Instructor Joined 25 May 2010 Posted: 15362 messages Followed by: 1866 members Upvotes: 13060 GMAT Score: 790 Top Reply mals24 wrote: Bank depositors in the United States are all financially protected against bank failure because the government insures all individuals' bank deposits. An economist argues that this insurance is partly responsible for the high rate of bank failures, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money. The economist's argument makes which of the following assumptions? (A) Bank failures are caused when big borrowers default on loan repayments. (B) A significant proportion of depositors maintain accounts at several different banks. (C) The more a depositor has to deposit, the more careful he or she tends to be in selecting a bank. (D) The difference in the interest rates paid to depositors by different banks is not a significant factor in bank failures. (E) Potential depositors are able to determine which banks are secure against failure. I received a PM requesting that I respond. Premise: Insurance removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. Conclusion: The insurance is partly responsible for the high rate of bank failures. To determine the assumption, apply the NEGATION TEST. When the correct answer is negated, the conclusion will be invalidated. E, negated: Potential depositors are not able to determine which banks are secure against failure. Here, it is IRRELEVANT that insurance removes any financial incentive to find out whether a bank is secure, since -- even if depositors HAD incentive -- they would not be ABLE to determine which banks are secure. Implication: There is no link between the lack of financial incentive brought about by the insurance and the high rate of bank failures, invalidating the conclusion that the insurance is party to blame for the high rate of bank failures. The correct answer is E. _________________ Mitch Hunt Private Tutor for the GMAT and GRE GMATGuruNY@gmail.com If you find one of my posts helpful, please take a moment to click on the "UPVOTE" icon. Available for tutoring in NYC and long-distance. For more information, please email me at GMATGuruNY@gmail.com. Student Review #1 Student Review #2 Student Review #3 Free GMAT Practice Test How can you improve your test score if you don't know your baseline score? Take a free online practice exam. Get started on achieving your dream score today! Sign up now. Legendary Member Joined 28 Aug 2008 Posted: 2467 messages Followed by: 11 members Upvotes: 331 Top Reply You can weaken an argument as follows: 1)Cause occured but the effect did not occur 2)Cause did not occur but effect occurred. 3)There was an alternate cause for the stated effect 4) Stated cause and stated effect relationship is reversed. stated cause=>stated effect in the argument becomes stated effect=>stated cause(this weakens it) 5) There was a problem or bias in the data under consideration used to make the argument B When the government did not insure deposits, frequent bank failures occurred as a result of depositors' fears of losing money in bank failures This would fall under 2) which keads us to 3) also. Hope this helps! Good luck. Regards, CR Junior | Next Rank: 30 Posts Joined 23 Sep 2008 Posted: 17 messages Upvotes: 1 Apply the rule of negation here. Incase the potential depositers are not able to determine than the above statement does not hold good. So the author may have assumed this. Legendary Member Joined 22 Jul 2008 Posted: 683 messages Followed by: 2 members Upvotes: 73 Hey jyoti can you expain your point further by writing the conclusion as well I seem to have some difficulty in breaking the problem. Legendary Member Joined 31 May 2007 Posted: 541 messages Followed by: 3 members Upvotes: 21 Test Date: December 22nd Target GMAT Score: 760 GMAT Score: 680 conclusion: If depositors were more selective, then banks would need to be secure in order to compete for depositors' money. Key point - If depositors were more selective Assumption - there is a way for the depositors to be selective - i.e. know which banks are insured against failure. imo E Legendary Member Joined 22 Jul 2008 Posted: 683 messages Followed by: 2 members Upvotes: 73 Thanks guys for the explanations Master | Next Rank: 500 Posts Joined 09 Nov 2008 Posted: 139 messages Upvotes: 3 Test Date: March 25th Target GMAT Score: 770 GMAT Score: 620 Continuation of the above question II.Which of the following, if true, most seriously weakens the economist's argument? (A) Before the government started to insure depositors against bank failure, there was a lower rate of bank failure than there is now. (B) When the government did not insure deposits, frequent bank failures occurred as a result of depositors' fears of losing money in bank failures. (C) Surveys show that a significant proportion of depositors are aware that their deposits are insured by the government. (D) There is an upper limit on the amount of an individual's deposit that the government will insure, but very few individuals' deposits exceed this limit. (E) The security of a bank against failure depends on the percentage of its assets that are loaned out and also on how much risk its loans involve. OA: B Junior | Next Rank: 30 Posts Joined 02 Aug 2010 Posted: 24 messages Re opening the thread . For the assumption question .Why d is not the answer ? If its a causal relationship type question( X causes Y ) then D shld work fine .As It removes all the other possibilities & assumes that only X caused Y .Moreover for the very next question ( the weaken one ) as the correct answer is B .So this also proves that the ' CONCLUSION is --> "this insurance is partly responsible for the high rate bank failures." not "If depositors were more selective, then banks would need to be secure in order to compete for depositor's money." & if this is the economists conclusion ( 'economists argument' is in the question in both the questions ) then D shld suffice . Please help .... Junior | Next Rank: 30 Posts Joined 21 Mar 2011 Posted: 10 messages I know this is an old thread but can someone please clarify the first question (assumption one) for me. Conclusion - insurance is partly responsible for the high rate of bank failures (Isn't this the conclusion? Someone has mentioned the conclusion to be different previously in this thread) Premise - depositors insured against bank failures,depositor not concerned abt finding risk free bank, no competition I chose D on the basis that it does away with an alternate cause. Should the alternate cause be also mentioned in the passage? I did not choose E because for E to be an assumption, the conclusion would have to be something like "The high rate of bank failures will decrease if depositors are more careful in selecting banks". The assumption in option E then makes sense. Also, if you negate E, it says "Potential depositors are not able to determine which banks are secure against failure". This clearly strengthens the argument instead of breaking it. Bank failures rates are increasing as depositors are not able to differentiate between risk free and non risk free banks, and they deposit in banks which might fail in the future thereby increasing the failure rates. Legendary Member Joined 26 Feb 2011 Posted: 1112 messages Followed by: 49 members Upvotes: 77 @vishal Hi Vishal, even i have the exactly same question for Q-1....i guess most of the people read Power Score CR Bible for GMAT, in assumption chapter, there are two techniques 1) supporter 2) defender if i follow the second technique then Op D seems to me perfect...even i check word to word that if there is any flaw, but haven't find any??? Any expert please clear... ### GMAT/MBA Expert GMAT Instructor Joined 12 Sep 2010 Posted: 905 messages Followed by: 122 members Upvotes: 378 GMAT Score: 760 vishalchaudhury wrote: I know this is an old thread but can someone please clarify the first question (assumption one) for me. Conclusion - insurance is partly responsible for the high rate of bank failures (Isn't this the conclusion? Someone has mentioned the conclusion to be different previously in this thread) Premise - depositors insured against bank failures,depositor not concerned abt finding risk free bank, no competition I chose D on the basis that it does away with an alternate cause. Should the alternate cause be also mentioned in the passage? I did not choose E because for E to be an assumption, the conclusion would have to be something like "The high rate of bank failures will decrease if depositors are more careful in selecting banks". The assumption in option E then makes sense. Also, if you negate E, it says "Potential depositors are not able to determine which banks are secure against failure". This clearly strengthens the argument instead of breaking it. Bank failures rates are increasing as depositors are not able to differentiate between risk free and non risk free banks, and they deposit in banks which might fail in the future thereby increasing the failure rates. the correct modeling of the argument is depositors are insured -> no incentive for the depositors to shop around for the "safer" banks -> no incentive for the banks to become "safer" -> banks fail -> insurance is partly responsible for failure E is definitely a necessary assumption, and can be reached by negation as well - if depositors are not able to determine which banks are "safe", then they won't be able to effectively "shop" for the safer banks, - breaking the chain in the second link as the banks won't have any incentive to become safer even if insurance were taken off the table. The reverse of E weakens the argument's logic, so E is indeed as assumption the author must make in order to make his point. For the same negation technique to work with D, the conclusion needs to be stronger and more clear cut in assigning the blame ONLY or MAINLY to the insurance. If the argument had concluded that insurance IS the reason for bank failures, then D would weaken this conclusion as an alternative explanation for bank failures. But the conclusion that insurance is "partly responsible" for failures is not really weakened by the introduction of another factor in bank failures such as interest rates - the two can coexist as partial factors. The key to correctly handling CR questions is to determine to yourself what the right answer should do, BEFORE looking at the answer choices. Read the argument, construct the "chain of reasoning" above, then ask yourself "what must the author assume for this to be true?". One thing that pops us is "the author's argument talks about giving the depositors the incentive to choose the safer banks, but doesn't say that they are able to make intelligent and informed decisions, given the incentive to do so - he's assuming this ability as a given". Then go and look for an answer choice that says that, and do not let yourself be swayed by trap answer choices that also "seem" right. _________________ Geva Senior Instructor Master GMAT 1-888-780-GMAT https://www.mastergmat.com Free 7-Day Test Prep with Economist GMAT Tutor - Receive free access to the top-rated GMAT prep course including a 1-on-1 strategy session, 2 full-length tests, and 5 ask-a-tutor messages. Get started now. Newbie | Next Rank: 10 Posts Joined 28 Aug 2013 Posted: 1 messages Thank you very much vishalchaudhury for raising this question and thank you so very much Geva@EconomistGMAT for answering this question so beautifully. I was stuck with this same question from past 2 days and Geva's answer finally came to rescue. • Free Veritas GMAT Class Experience Lesson 1 Live Free Available with Beat the GMAT members only code • Magoosh Study with Magoosh GMAT prep Available with Beat the GMAT members only code • Get 300+ Practice Questions 25 Video lessons and 6 Webinars for FREE Available with Beat the GMAT members only code • Award-winning private GMAT tutoring Register now and save up to$200

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