Free Practice Question
RC · Reading Comprehension
555-605
Short Passage - Humanities
Reading Passage
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 policymakers 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.
The passage suggests that the high inflation in the United States and many European countries in the 1980’s differed from inflation elsewhere in which of the following ways?
Answer Choices
Correct answer marked belowA
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 workers’ and employers’ expectations.
It would not necessarily be considered high elsewhere.
Correct
See the full step-by-step explanation
You can see the correct answer above. Sign in for free to unlock the complete worked solution.
Track your performance and improve
Get detailed analytics, unlock full explanations, and move up difficulty tiers as you practice.
Explanation
Unlock the full explanation
Create a free account to reveal the correct answer, see the step-by-step explanation, and start tracking your GMAT progress.
Comments
Sign in to join the discussion
No comments yet
Be the first to share your thoughts and help others understand it better.
Sign in to commentWhat this question tests
What it tests
Your ability to understand a passage, its structure, and what the author is really saying. At the 555-605 level, accuracy and speed both matter.
Common trap
Answering from memory or outside knowledge instead of strictly from the passage.
Details
Difficulty
555-605
Type
RC
Category