Inspired By A Wave Of Uncertainty About Currencies In Several Emerging GMAT Reading Comprehension

Reading Passage Question

Inspired by a wave of uncertainty about currencies in several emerging markets in recent years, many investment banks are beginning to market their versions of a new investment tool designed to predict when a currency’s value will decline sharply. Many academics and economists have combined their efforts to create these “risk indicators'' in order to predict when financial turmoil in a nascent capitalist market is forthcoming.

Creators of this new model define a currency crisis as a drop of at least 10 percent in a currency’s real value. Working with a list of all of the currency crises that have occurred within the past ten years, researchers suggest a number of market or economic variables that may have helped bring the crashes about. Such factors include a country’s exchange-rate overvaluation, slowing economic growth, or a rising debt burden. Statisticians then use sophisticated econometrics to look for relationships between these factors and the currency dips they may have caused.

Representatives of the International Monetary Fund (IMF) question whether these new models are any improvement over the techniques that are currently in place. The risk indicators, the IMF argues, are too dependent on the benefit of hindsight and cannot account for any new economic phenomena that may arise. The IMF has also accused some of the investment banks of “data mining,” whereby analysts configure the information they cull from various sources until they finally verify the conclusion they have conditioned themselves to seek.

Further skepticism has been fueled by a comparison study of the risk indicator models, which was convened by Andrew Berg and Catherine Pattillo, a pair of IMF economists. After funneling economic data through each of the three most prominent models, Berg and Pattillo determined that none would have accurately predicted Asia’s currency freefall that began when Thailand’s baht was dislodged from its American dollar standard in July 1997. In fact, two models would have sounded a more severe alarm toward the Philippines, which has not undergone a currency crisis, than for either South Korea or Thailand, whose respective recoveries may never be complete.

“Inspired by a wave of uncertainty about currencies in several emerging”- is a GMAT reading comprehension exercise. Candidates need to be highly proficient in GMAT reading comprehension. There are three comprehension questions in this GMAT reading comprehension section. The purpose of the GMAT Reading Comprehension questions is to evaluate candidates' comprehension, analysis, and application skills. Candidates who are actively preparing can benefit from GMAT Reading Comprehension Practice Questions.

Solutions and Explanation

1. The passage is chiefly concerned with

1. warning that attempting to predict currencies fluctuations is a useless enterprise
2. advocating the indispensable role of the IMF in stabilizing the currencies of countries to which capitalism is relatively new
3. expressing doubts as to the reliability of some new attempts to predict financial phenomena
4. contrasting new and sophisticated financial models with older methods that are more concerned with careful research
5. recommending that better investor models be created before one isolated contagion leads to worldwide recession

2. Which of the following does the passage suggest about South Korea?

1. It has received financial consultation and support from the IMF.
2. Its currency recently devalued by more than 10 percent.
3. Its economy is currently growing slower than that of the Philippines.
4. The new risk indicators would have detected its economic downturn had they been in place several years ago.
5. Its currency is closely tied to the American dollar.

3. Which of the following, if it happened soon after this article was published, would undermine the skepticism toward the viability of the “risk indicator” models?

1. The value of the Filipino peso plummeted.
2. Berg and Pattillo resigned from the IMF.
3. The South Korean economy showed signs of slowing down further.
4. Thailand restored its connection to the American dollar.
5. The IMF changed its definition of a currency crisis to an 8 percent drop in value.

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