PrepTest 151, Section 2, Question 21
Economist: Currently the interest rates that banks pay(63 more words not shown)
The economist's conclusion follows logically(8 more words not shown)
- ABanks will not(16 more words not shown)
- BMost small and(12 more words not shown)
- CFive years ago,(11 more words not shown)
- DThe interest rates(16 more words not shown)
- EThe interest rates(18 more words not shown)
Reading the argument
What about loans to large, financially strong companies?
We know lending to small and medium-sized companies has fallen. We also know banks won't currently lend to financially weak companies. But lending to large, strong companies might have increased enough to offset the decline elsewhere. Moving money from one group of borrowers to another wouldn't necessarily reduce total lending.
The interest-rate comparison makes such lending look unattractive: banks would pay a higher rate to borrow than they could collect on these loans. That sounds like a reason to hold back. Still, the passage hasn't said that banks refuse every loan with that unfavorable rate comparison.
What we’re looking for
We're asked to make the conclusion follow. My initial prediction is that lending to the remaining group has also fallen, or at least hasn't risen enough to offset the drop in small- and medium-company lending.
Working the answers
- ACorrect
This gives us a rule that settles the remaining group. Banks won't lend at a rate below what they pay to borrow. The first sentence tells us that loans to large, financially strong companies currently have exactly that unfavorable rate relationship. So under A, banks won't make those loans.
Now account for all the companies. Lending to small and medium-sized companies is down. Large, financially weak companies receive no loans under the stated policy, and large, financially strong companies receive none under A. Current lending to large companies is therefore zero; it cannot have risen above its level five years ago to offset the decline elsewhere. Total lending must be lower.
A doesn't directly say 'large-company lending hasn't risen.' It gets us there by combining its rule with the interest-rate fact. That's why the apparently technical opening sentence matters.
- B
Being financially stronger five years ago doesn't establish whether a company was financially strong at either time. On an imaginary strength scale of 100, a fall from 2 to 1 would make a company weaker without making it strong at the earlier point. More importantly, B concerns small and medium-sized companies, whose lending decline is already given. It leaves open a larger increase in lending to large, strong companies.
- C
This adds a kind of lending that occurred five years ago and no longer occurs. That could contribute to a decline, but it doesn't prove the total declined. Lending to large, financially strong companies could still have grown enough to offset the lost lending to other groups. Historical lending matters to this comparison; C just doesn't close the missing part of it.
- D
Higher borrowing rates don't tell us how much banks lend. We need a rule connecting an unfavorable rate relationship to a refusal to make the loans at issue. A supplies that rule; D supplies another rate comparison while leaving the volume of large-company lending unresolved.
- E
The rates paid by different groups of companies don't establish the amounts lent to them. Even with this rate difference, banks could have increased lending to large, strong companies. E doesn't rule out the offset that prevents the conclusion from following.
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