When Germany was asked to pay

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akhpad: Legendary Member; Posts: 809; Joined: Wed Mar 24, 2010 10:10 pmFollowed by: 4 members; Thanked: 50 times

by akhpad » Tue Jul 20, 2010 3:13 am

Source: Veritas Prep CR-1

Q44.
When Germany was asked to pay 132 billion gold marks in a war reparations following World War 1, the Germany government had to print money to pay its bills, drastically devaluing the currency. In response to this anticipated devaluation, German began spending their money while it still had purchasing power, almost completely depleting the monetary stores of domestic bank.

Which of the following, if true, taken together with the information above, best supports the conclusion that the devaluation of the German mark was likely to continue?

A: The recipient governments of the war reparations began to demand that the reparation be paid in goods and commodities, such as coal.
B: The amount of 132 billion gold marks was the largest war reparations amount ever levied to the point.
C: In the post-World War 1 period, the German government had only two options for preventing complete economic collapse print money or take out loans from domestic banks.
D: Printing currency causes inflation when the money is not based on hard assets such as gold or land.
E: The more consumer make purchase, the more money is returned into a current's economy.

OA: C

Please explain.

Last edited by akhpad on Tue Jul 20, 2010 8:26 pm, edited 1 time in total.

Source: Beat The GMAT — Critical Reasoning | Tue Jul 20, 2010 3:13 am

ayushiiitm: Master | Next Rank: 500 Posts; Posts: 216; Joined: Wed Jul 23, 2008 2:35 am; Location: Pune, India; Thanked: 5 times; GMAT Score:700

by ayushiiitm » Tue Jul 20, 2010 4:16 am

akhp77 wrote:Source: Veritas Prep CR-1

Q44.
When Germany was asked to pay 132 billion gold marks in a war reparations following World War 1, the Germany government had to print money to pay its bills, drastically devaluing the currency. In response to this anticipated devaluation, German began spending their money while it still had purchasing power, almost completely depleting the monetary stores of domestic bank.

Which of the following, if true, taken together with the information above, best supports the conclusion that the devaluation of the German mark was likely to continue?

A: The recipient governments of the war reparations began to demand that the reparation be paid in goods and commodities, such as coal.
B: The amount of 132 billion gold marks was the largest war reparations amount ever levied to the point.
C: In the post-World War 1 period, the German government had only two options for preventing complete economic collapse print money or take out loans from domestic banks.
D: Printing currency causes inflation when the money is not based on hard assets such as gold or land.
E: The more consumer make purchase, the more money is returned into a current's economy.

Please explain.

imo d
THE EVIDENCE GIVEN ARE
the Germany government print money to pay its bills, that devalued the currency.
Because people thought currency would be devalued, they started spending more. So there was more supply in the market. More money was available than the number of goods. So prices of goods increased, since number of buyers was more.

Now devaluation would continue, if money keeps on coming into the market
D: Printing currency causes inflation when the money is not based on hard assets such as gold or land.....is one of the reason that now prices will be higher so people will continue spending more

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reply2spg: Legendary Member; Posts: 1261; Joined: Sun Sep 14, 2008 3:46 am; Thanked: 27 times; GMAT Score:570

by reply2spg » Tue Jul 20, 2010 9:10 pm

C is better here. Let's say Germany is depending on printing money or taking out loans from domestic banks. Let's say it is depending 50% on each.

Now as per the passage 'In response to this anticipated devaluation, German began spending their money while it still had purchasing power, almost completely depleting the monetary stores of domestic bank'. Since domestic bank doesn't have money, entire burden is on printing money. Printing money is devaluing the currency. Therefore, C is correct

HTH!!!!

akhp77 wrote:Source: Veritas Prep CR-1

Q44.
When Germany was asked to pay 132 billion gold marks in a war reparations following World War 1, the Germany government had to print money to pay its bills, drastically devaluing the currency. In response to this anticipated devaluation, German began spending their money while it still had purchasing power, almost completely depleting the monetary stores of domestic bank.

Which of the following, if true, taken together with the information above, best supports the conclusion that the devaluation of the German mark was likely to continue?

A: The recipient governments of the war reparations began to demand that the reparation be paid in goods and commodities, such as coal.
B: The amount of 132 billion gold marks was the largest war reparations amount ever levied to the point.
C: In the post-World War 1 period, the German government had only two options for preventing complete economic collapse print money or take out loans from domestic banks.
D: Printing currency causes inflation when the money is not based on hard assets such as gold or land.
E: The more consumer make purchase, the more money is returned into a current's economy.

OA: C

Please explain.

Sudhanshu
(have lot of things to learn from all of you)

abhigang: Senior | Next Rank: 100 Posts; Posts: 92; Joined: Tue Jul 20, 2010 6:56 am; Thanked: 4 times

by abhigang » Wed Jul 21, 2010 3:25 am

IMO D.

akhpad: Legendary Member; Posts: 809; Joined: Wed Mar 24, 2010 10:10 pmFollowed by: 4 members; Thanked: 50 times

by akhpad » Wed Jul 21, 2010 9:44 pm

abhigang wrote:IMO D.

I have already mentioned OA. people just write IMO without any explanation.

ashish2104: Master | Next Rank: 500 Posts; Posts: 191; Joined: Sat Jun 26, 2010 9:27 amFollowed by: 2 members; Thanked: 6 times

by ashish2104 » Thu Jul 22, 2010 1:15 am

IMO C.

It took me a little over 2 mins to answer this.

Firstly, this is an assumption question.
Chocie A-> cannot devalue the currency as it would be protected by other goods and commodities
Choice B-> Negate this , does it affect the conclusion that devaluation of germany wud continue? No. hence out
Choice D->We are not bothered about other means causing inflation
Chocie E-> Out of scope. Purchasing power of consumer's if returns more money into the economy, can only help germany to keep their currency from devaluating

Now come to choice C-> If germany had only 2 options, both of which are related to money will continiue devaluatuion of germany mark.

hence C.

abhigang: Senior | Next Rank: 100 Posts; Posts: 92; Joined: Tue Jul 20, 2010 6:56 am; Thanked: 4 times

by abhigang » Thu Jul 22, 2010 2:38 am

Can you please explain your line of reasoning to eliminate D?
The question stem was looking for an explanation which says that the devaluation will continue. But choice C says that Germany had two options post World War I, one to print money (which Germany had already chosen) and the other one is to take loan. So this option is talking about two options which , i believe, are the causes of devaluation. Hence, this cannot be a reason which supports that devaluation will continue.
On the other hand, consider option D. It is said in the stimulus that printing money devalues currency. The option D gives one reason why printing currency causes devaluation since inflation causes devalaution of money. Hence, I feel that this is a good choice.
But the OA says it is C. Hence I want to know where I am going wrong in my reasoning.

ashish2104: Master | Next Rank: 500 Posts; Posts: 191; Joined: Sat Jun 26, 2010 9:27 amFollowed by: 2 members; Thanked: 6 times

by ashish2104 » Thu Jul 22, 2010 3:10 am

If you have only 2 choices to repay and both of those choices relate to money....then u can safely say without these two your currency will not devaluate(negation technique).

D does look tempting because it mentions words from argument like printing currency. but in argument, When Germany was asked to pay 132 billion gold marks in a war reparations following World War 1, we are talking about gold not anything without gold. Hence I ruled out D.

Hope this helps.

FightWithGMAT: Master | Next Rank: 500 Posts; Posts: 364; Joined: Tue Apr 20, 2010 5:13 amFollowed by: 3 members; Thanked: 31 times

by FightWithGMAT » Thu Jul 22, 2010 4:42 am

akhp77 wrote:Source: Veritas Prep CR-1

Q44.
When Germany was asked to pay 132 billion gold marks in a war reparations following World War 1, the Germany government had to print money to pay its bills, drastically devaluing the currency. In response to this anticipated devaluation, German began spending their money while it still had purchasing power, almost completely depleting the monetary stores of domestic bank.

Which of the following, if true, taken together with the information above, best supports the conclusion that the devaluation of the German mark was likely to continue?

A: The recipient governments of the war reparations began to demand that the reparation be paid in goods and commodities, such as coal.
B: The amount of 132 billion gold marks was the largest war reparations amount ever levied to the point.
C: In the post-World War 1 period, the German government had only two options for preventing complete economic collapse print money or take out loans from domestic banks.
D: Printing currency causes inflation when the money is not based on hard assets such as gold or land.
E: The more consumer make purchase, the more money is returned into a current's economy.

OA: C

Please explain.

Post world war, Germany did not have sufficient cash to pay out the bills.

Germany print money--> devalue currency--depletion of cash in the country----(ultimately insufficient cash to pay the bills).

It makes a circle of events.

Germany had only 2 options-- either print money or take loans from banks-----in either of the situations Germany reaches the point of insufficient cash---so devaluing was inevitable.

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