Is it possible to decrease inflation without causing a recession and its concomitant increase in unemployment? The orthodox answer is...
GMAT Reading Comprehension : (RC) Questions
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?
1. Passage Analysis:
Progressive Passage Analysis
| Text from Passage | Analysis |
|---|---|
| Is it possible to decrease inflation without causing a recession and its concomitant increase in unemployment? | What it says: Can we lower inflation without creating economic downturns and job losses? What it does: Poses the central question that drives the entire passage Source/Type: Author's framing question Connection to Previous Sentences: This is our starting point - no previous information to connect to Visualization: GOAL: Lower inflation (say from 8% to 3%) CHALLENGE: Avoid recession (negative economic growth) and unemployment spikes Reading Strategy Insight: Question openings signal the main debate we'll explore. Everything that follows will relate to this central tension. What We Know So Far: There's a potential conflict between fighting inflation and maintaining economic stability What We Don't Know Yet: What different groups think about this question |
| The orthodox answer is "no." | What it says: The mainstream/traditional economic view is that you cannot reduce inflation without causing recession and unemployment What it does: Provides the first answer to the opening question Source/Type: Author reporting mainstream economic consensus Connection to Previous Sentences: This directly answers the question from sentence 1. This is straightforward - the author is giving us the traditional viewpoint first. Visualization: TRADITIONAL VIEW: Lowering inflation → REQUIRES → Recession + Job losses It's a necessary trade-off according to most economists Reading Strategy Insight: Authors often present the "standard view" first before introducing alternatives or complications. |
| 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. | What it says: Even though economists have different theories about what causes inflation, they agree on the solution: strict government policies that unfortunately cause recessions What it does: Supports the "orthodox answer" by showing broad agreement despite theoretical differences Source/Type: Author explaining economist consensus Connection to Previous Sentences: This builds on sentence 2 by providing evidence for why the orthodox answer is "no." Despite disagreeing on causes, economists agree on the harsh reality of the solution. Visualization: THEORY A (Inertia): Past inflation + Economic cycles + Import costs → Current inflation THEORY B (Expectations): Worker/employer expectations + Weak policies → Current inflation BOTH THEORIES → Same solution: Tight policies → Recession (but lower inflation) Reading Strategy Insight: Don't get lost in the theory details - the key point is agreement on the painful solution. |
| 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. | What it says: Economists use 1980s examples from Europe and US where countries successfully reduced inflation, but had to accept high unemployment as the cost What it does: Provides historical evidence supporting the orthodox economic view Source/Type: Historical facts cited by economists Connection to Previous Sentences: This gives real-world proof of what economists argued in the previous sentence. The theory becomes concrete historical reality. Visualization: 1980s REALITY: Europe + US: High inflation → Tight policies → SUCCESS (lower inflation) BUT → Sharp unemployment increase This confirms: You can't avoid the painful trade-off Reading Strategy Insight: Historical examples often reinforce theoretical claims. This strengthens rather than complicates the orthodox position. What We Know So Far: Orthodox view says inflation-fighting requires recession; economists agree despite theory differences; 1980s proved this trade-off What We Don't Know Yet: Whether anyone disagrees with this orthodox view |
| Nevertheless, some governments' policymakers insist that direct controls on wages and prices, without tight monetary and fiscal policies, can succeed in decreasing inflation. | What it says: However, some government officials believe they can reduce inflation through price and wage controls instead of the harsh orthodox approach What it does: Introduces the alternative viewpoint that contrasts with orthodox economics Source/Type: Government policymakers' claims Connection to Previous Sentences: "Nevertheless" signals a direct contrast to everything we've heard so far. This builds on our opening question by presenting the opposing answer. Visualization: ORTHODOX APPROACH: Tight policies → Recession → Lower inflation vs. ALTERNATIVE APPROACH: Wage/price controls (no tight policies) → Lower inflation (no recession) Reading Strategy Insight: "Nevertheless" and "However" are contrast signals - expect the opposite viewpoint. This gives us both sides of our opening debate. |
| 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. | What it says: Sadly, the alternative approach doesn't work because it ignores inflation's root causes, so the controls fail, inflation comes back worse, and even though there's no immediate recession, the economy suffers long-term damage What it does: Critiques and ultimately rejects the alternative approach Source/Type: Author's analysis/judgment Connection to Previous Sentences: This resolves our opening question by showing why the alternative fails, thus supporting the orthodox view. The author presents both sides but ultimately sides with the economists. Visualization: ALTERNATIVE APPROACH TIMELINE: Step 1: Impose wage/price controls → Inflation appears to decrease Step 2: Controls collapse → Suppressed inflation resurfaces strongly Step 3: Long-term economic damage from price distortions RESULT: Short-term gain, long-term pain Reading Strategy Insight: "Unfortunately" signals the author's verdict. We return to supporting the orthodox view - this is conclusion, not new complexity. Final Answer to Opening Question: No, you cannot decrease inflation without economic pain - the orthodox economists are right. |
2. Passage Summary:
Author's Purpose:
To examine whether it's possible to reduce inflation without causing economic hardship by presenting and evaluating two competing approaches to fighting inflation.
Summary of Passage Structure:
The author builds their analysis by systematically presenting both sides of an economic debate:
- First, the author poses a key economic question about whether we can fight inflation without causing recession and unemployment.
- Next, they present the mainstream economic view that says this is impossible and explain why most economists agree that harsh policies are necessary, backing this up with real examples from the 1980s.
- Then, they introduce an alternative viewpoint from government policymakers who believe wage and price controls can reduce inflation without the economic pain.
- Finally, they critique this alternative approach by explaining why it ultimately fails and causes long-term economic damage, thus supporting the orthodox economic position.
Main Point:
You cannot successfully reduce inflation without accepting economic pain in the short term. While government policymakers may try to avoid this harsh reality through wage and price controls, such approaches ultimately fail and cause worse long-term damage to the economy.
1. Question Analysis:
This question asks us to identify how the inflation experienced by the US and European countries in the 1980s was different from inflation elsewhere. The key phrase is "differed from inflation elsewhere," which means we need to find what made their inflation unique compared to other places or times.
Connecting to Our Passage Analysis:
From our passage analysis, we know that the 1980s example appears in the fourth section where economists use historical evidence to support the orthodox view. The passage states that "many European countries and the United States conquered high (by these countries' standards) inflation." The critical phrase here is "by these countries' standards" - this parenthetical comment suggests that what was considered "high" inflation in these developed countries might not be considered high elsewhere.
Our passage analysis shows this sentence provides "historical evidence supporting the orthodox economic view" and demonstrates "real-world proof" of economic theory. However, the author includes a specific qualifier about the inflation being "high" only by the standards of these particular countries.
Prethinking:
The parenthetical phrase "(by these countries' standards)" is not accidental - it's the author's way of indicating that the inflation rates that seemed problematic to the US and European countries in the 1980s were only considered "high" relative to what those countries typically experienced. This suggests that the same inflation rates might be considered normal or even low in other parts of the world where higher inflation is more common. This qualifier is the only distinguishing characteristic the passage provides about 1980s inflation in these countries compared to inflation "elsewhere."
Why It's Wrong:
- The passage presents both inertia and rational expectations theories as explanations supported by "most economists" without suggesting the 1980s inflation fit one theory but not the other
- No evidence suggests the 1980s inflation was theory-specific
- The passage treats both theories as equally valid explanations for inflation generally
Common Student Mistakes:
- Did the passage suggest one theory was more applicable to the 1980s? → No, the passage presents both theories as accepted explanations without temporal distinctions
- Does mentioning worker/employer expectations relate specifically to the 1980s? → No, this is presented as a general theory, not specific to that decade
Why It's Wrong:
- The passage explicitly states that the 1980s countries "conquered high inflation, but only by applying tight monetary and fiscal policies that sharply increased unemployment"
- This directly contradicts the idea that it was controllable without recession
- The 1980s example is used to prove that recession IS necessary to control inflation
Common Student Mistakes:
- Was the 1980s inflation easy to control? → No, it required "tight policies that sharply increased unemployment"
- Does "conquered" mean it was easy? → No, the context shows it required painful economic trade-offs
Why It's Wrong:
- The passage provides no comparison between how easy it was to control inflation in these countries versus elsewhere
- The 1980s example demonstrates the difficulty of control, not relative ease
- No information suggests these countries had advantages in implementing tight policies compared to other nations
Common Student Mistakes:
- Does "conquered" suggest it was easier for these countries? → No, it just means they succeeded, with no comparison to other countries' experiences
- Are developed countries better at implementing tight policies? → The passage doesn't make this comparison
Why It's Wrong:
- The passage doesn't suggest that expectations were absent in causing 1980s inflation
- The rational expectations theory is presented as a general explanation that could apply to any inflation, including the 1980s
- No evidence indicates the 1980s inflation had different causes than inflation elsewhere
Common Student Mistakes:
- Was the 1980s inflation caused by different factors? → The passage doesn't suggest different causation, only different perception of severity
- Does the passage exclude expectations as a cause in the 1980s? → No, both theories are presented as general explanations
Why It's Right:
- The parenthetical phrase "(by these countries' standards)" directly indicates that what was considered "high" inflation in the US and Europe was only high relative to their own typical experience
- This qualifier suggests that the same inflation rates might not be considered high in other countries where higher inflation is more normal
- This is the only distinguishing characteristic the passage provides about how 1980s inflation in these countries differed from inflation elsewhere
Key Evidence: "many European countries and the United States conquered high (by these countries' standards) inflation"