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GMATPrep RC - Economics

tagged by: mevicks

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mevicks Master | Next Rank: 500 Posts
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GMATPrep RC - Economics

Thu Oct 17, 2013 7:07 pm
Is it possible to decrease inflation without causing a recession and its concomitant increase in unemployment? The orthodox answer is "no." Whether they support the "inertia" theory of inflation (that today's inflation rate is caused by yesterday's inflation, the state of the economic cycle, and external influences such as import prices) or the "rational expectations" theory (that inflation is caused by workers' and employers' expectations, coupled with a lack of credible monetary and fiscal policies), most economists agree that tight monetary and fiscal policies, which cause recessions, are necessary to decelerate inflation. They point out that in the 1980's, many European countries and the United States conquered high (by these countries' standards) inflation, but only by applying tight monetary and fiscal policies that sharply increased unemployment. Nevertheless, some governments' policymakers insist that direct controls on wages and prices, without tight monetary and fiscal policies, can succeed in decreasing inflation. Unfortunately, because this approach fails to deal with the underlying causes of inflation, wage and price controls eventually collapse, the hitherto-repressed inflation resurfaces, and in the meantime, though the policy-makers succeed in avoiding a recession, a frozen structure of relative prices imposes distortions that do damage to the economy's prospects for long-term growth.

Which of the following, if true, would most strengthen the authorâ€™s conclusion about the use of wage and price controls?
A) Countries that repeatedly use wage and price controls tend to have lower long-term economic growth rates than do other countries.
B) Countries that have extremely high inflation frequently place very stringent controls on wages and prices in an attempt to decrease the inflation.
C) Some countries have found that the use of wage and price controls succeeds in decreasing inflation but also causes a recession.
D) Policymakers who advocate the use of wage and price controls believe that these controls will deal with the underlying causes of inflation.
E) Policymakers who advocate the use of wage and price controls are usually more concerned about long-term economic goals than about short-term economic goals.

The passage suggests that the high inflation in the United States and many European countries in the 1980â€™s differed from inflation elsewhere in which of the following ways?
A) It fit the rational expectations theory of inflation but not the inertia theory of inflation.
B) It was possible to control without causing a recession.
C) It was easier to control in those countries by applying tight monetary and fiscal policies than it would have been elsewhere.
D) It was not caused by workersâ€™ and employersâ€™ expectations.
E) It would not necessarily be considered high elsewhere.

The primary purpose of the passage is to
A) apply two conventional theories.
B) examine a generally accepted position
C) support a controversial policy
D) explain the underlying causes of a phenomenon
E) propose an innovative solution

OA: A E B

Last edited by mevicks on Sun Oct 20, 2013 7:29 pm; edited 1 time in total

sahilchaudhary Master | Next Rank: 500 Posts
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Test Date:
27 Dec 2013
Target GMAT Score:
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GMAT Score:
540
Sun Oct 20, 2013 10:39 am

1. Conclusion - The author thinks that wage and price controls damage economy's prospects for long-term growth.
A - Correct (Seems best of all)
B - Irrelevant to the conclusion
C - Weakens, as the author says it helps to avoid recession
D - Weaken, as the author says they do not deal with underlying causes of inflation
E - Weaken, because if the policy makers thought about long term economic goals, they would have not used wage and price controls.

2. "They point out that in the 1980's, many European countries and the United States conquered high (by these countries' standards)"
A - Incorrect
B - Incorrect
C - Incorrect
D - Incorrect
E - Correct

3. The passage states 2 theories, then gives an example and then provides his own views.
A - Incorrect, as the author is not applying both the theories.
B - Incorrect, as the author is not examining a generally accepted position
C - Incorrect, as the author doesn't support it, but says that it fails to deal with the underlying causes of inflation.
D - Correct
E - Incorrect, as the author is not proposing a solution.

Please share the OA for the above questions.

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Sahil Chaudhary
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mevicks Master | Next Rank: 500 Posts
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Sun Oct 20, 2013 7:27 pm
Nice explanations Sahil. The first two are correct, however the third one (which requires understanding the Big Picture of this convoluted passage) is indeed tricky when solving within strict time constraints.

Here are my 2 cents on the passage...

Main Idea (1st two lines):
It is actually not possible to decrease inflation without causing a recession and a corresponding increase in unemployment
Some keywords which point this out: Orthodox, most economists

Mapping:
Majority agree that tight monetary and fiscal policies reqd --> to reduce Inflation
(they might be supporting I-Theory or R-Theory BUT in the end agree on the above point)

US/Europe example provided to strengthen the above.

Some say that controls on wages and prices can decrease inflation without causing a recession (and dont support tight monetary and fiscal policies) --> This approach fails due to the reasons provided in the last line.

The primary purpose of the passage is to
A) apply two conventional theories.
Although 2 theories are mentioned (Inertia, Rational), they are not main point of the entire passage. The author only uses these theory to say something about the economists (economist support either of the two viewpoints)
B) examine a generally accepted position
This is not directly stated but if you consider the Big Picture this is indeed the answer. The word orthodox (conventional, generally accepted beliefs) signals this.
C) support a controversial policy
The author mentions a policy to which most economist agree (1st half), so there is no controversy as such
D) explain the underlying causes of a phenomenon
The author is not giving his viewpoints and justifying/detailing them. He is just presenting some facts and viewpoints of the economists.
E) propose an innovative solution
There is no innovation as such.

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