Reading Comprehension
Verbal Ability

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Common Information

After the end of World War II, a pervasive, but unfortunately fallacious, economic perspective took hold. Based on the United States’ successful emergence from the Depression, the idea that war was good for an economy became fashionable. However, linking the United States economic recovery with its entry into World War II is a prime example of flawed economic thinking.

Supporters of the war benefits economy theory hold that a country at war is a country with a booming economy. Industry must produce weapons, supplies, food, and clothing for the troops. The increased production necessitates the hiring of more people, reducing unemployment.

More employment means more money in the pockets of citizens, who are then likely to go out and spend that money, helping the retail sector of the economy. Retail shops experience an increase in business and may need to hire more workers, further reducing unemployment and adding to the economic momentum. While this scenario sounds good in theory, it does not accurately represent what truly happens in a war time economy.

In reality, the government can fund a war in a combination of three ways. It can raise taxes, cut spending on other areas, or increase the national debt. Each of these strategies has a negative impact on the economy. An increase in taxes takes money out of an individual’s hands, leading to a reduction in consumer spending. Clearly, there is no net benefit to the economy in that case. Cutting spending in other areas has its costs as well, even if they are not as obvious.

Any reduction in government spending means the imposition of a greater burden on the benefactors of that government spending. Cutbacks in a particular program mean that the people who normally depend on that program now must spend more of their money to make up for the government cuts. This also takes money out of consumers’ hands and leaves the economy depressed. Of course, a government could go into debt during the war, but such a strategy simply means that at some point in the future, taxes must be increased or spending decreased. Plus, the interest on the debt must be paid as well.

Q.

Common Information Question: 3/4

The passage implies which of the following about a government that funds a war by increasing the national debt?

 A.

It is no worse off than it would be funding a war by cutting spending or increasing taxes.

 B.

The initial costs it incurs are less than with the other two methods, but the future costs are greater.

 C.

It must increase taxes in order to pay off the interest on the debt.

 D.

If the government does not increase taxes or decrease spending, its economy will not recover.

 E.

It receives a net benefit to the economy greater than it would achieve with either of the other two methods.

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Solution:
Option(B) is correct

This is an inference question. You can find the answer in the final paragraph, where the author says "Of course, a government could go into debt during the war, but such a strategy simply means that at some point in the future, taxes must be increased or spending decreased. Plus, the interest on the debt must be paid as well."

Choice A is the opposite of what the passage states—going into debt means not only will the government have to deal with the problems associated with increasing taxes or cutting spending, but it must also pay the interest on the debt.

Choice B is a better answer. In the short term, the government doesn’t have the problems associated with the other two solutions, but must face those problems, plus interest payments, in the future.

Choice C goes too far because it is not clear that a government "must" increase taxes. The passage says spending could be decreased.

Choice D makes an extreme and unsupported claim because the author doesn’t say the economy "will not recover" unless certain actions are taken.

Choice E is similar to A and is incorrect based on the information in the passage.


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