Reading Passage Question

The relevance of formal economic models to real-world policy has been a topic of some dispute. The economists R. D. Norton and S. Y. Rhee achieved some success in applying such a model retrospectively to the Korean economy over a fourteen-year period; the model’s figures for output, prices, and other variables closely matched real statistics. The model’s value in policy terms, however, proved less clearcut. Norton and Rhee performed simulations in which, keeping long-term factors constant, they tried to pinpoint the effect of short-term policy changes. Their model indicated that rising prices for imported oil would increase inflation; reducing exports by five percent would lower Gross Domestic Product and increase inflation; and slowing the growth of the money supply would result in slightly higher inflation.

These findings are somewhat startling. Many economists have argued that reducing exports will lessen, not increase, inflation. And while most view escalating oil costs as inflationary, few would think the same of slower monetary growth. The Norton-Rhee model can perhaps be viewed as indicating the pitfalls of a formalist approach that stresses statistical “goodness of fit” at the expense of genuine policy relevance.

“The relevance of formal economic models to real-world policy has been a topic of some dispute.”- is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 4 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

1. The author is primarily concerned with

(A) proposing a new type of economic analysis
(B) criticizing an overly formal economic model
(C) advocating the use of statistical models in determining economic policy
(D) suggesting an explanation for Korean inflation
(E) determining the accuracy of Norton and Rhee’s analysis

2. The author mentions “a fourteen-year period” (Highlighted) in order to

(A) indicate how far into the future Norton and Rhee’s model can make accurate predictions
(B) acknowledge the accuracy of Norton and Rhee’s model in accounting for past events
(C) explain the effect of reducing exports on inflation
(D) demonstrate the startling nature of Norton and Rhee’s findings
(E) expose the flaws in Norton and Rhee’s model

3. The most significant criticism leveled against Norton and Rhee’s model is that it

(A) excludes key statistical variables
(B) is too abstract to be useful in policy making
(C) fails to adjust for Korea’s high rate of inflation
(D) underestimates the importance of economic growth
(E) fails to consider the effect of short-term variations in the economy

4. It can be inferred that the most surprising finding of the Norton-Rhee study is that

(A) reducing exports would reduce inflation
(B) high oil prices worsen inflation
(C) an increase in exports can slow the rate of growth
(D) slower monetary expansion would worsen inflation
(E) long-term factors do not affect economic growth

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