Household Indebtedness, Which Some Theorists Regard as Causing Recession

Question: Household indebtedness, which some theorists regard as causing recession, was high preceding the recent recession, but so was the value of assets owned by households. Admittedly, if most of the assets were owned by quite affluent households, and most of the debt was owed by low-income households, high household debt levels could have been the cause of the recession despite high asset values: low-income households might have decreased spending in order to pay off debts while the quite affluent ones might simply have failed to increase spending. But, in fact, quite affluent people must have owed most of the household debt, since money is not lent to those without assets. Therefore, the real cause must lie elsewhere.

Which one of the following, if true, casts the most doubt on the argument?

1. Prior to the recent recession, middle-income households owed enough debt that they had begun to decrease spending.
2. The total value of the economy’s household debt is exceeded by the total value of assets held by households.
3. Low-income households somewhat decreased their spending during the recent recession.
4. During a recession the affluent usually borrow money only in order to purchase assets.
5. Household debt is the category of debt least likely to affect the economy.

“Household Indebtedness, Which Some Theorists Regard as Causing Recession” – this is a GMAT Critical question. This particular GMAT Critical Reasoning topic has been taken from the book ‘501 GMAT Questions’. In this particular topic, candidates need to choose the option that best suits the passage. GMAT critical reasoning tests the logical and analytical skills of the candidates. Critical reasoning in GMAT requires candidates to find the strengths and weaknesses of the argument, or find the logical flaw in the argument.  The GMAT CR section contains 10 -13 GMAT critical reasoning questions out of 36 GMAT verbal questions.

Answer: A
Explanation: GMAT critical reasoning tests the logical and analytical skills of the candidates. We can answer this GMAT critical reasoning question by either finding a piece of evidence that would weaken the argument or logical flaws in the argument. Let us check each and every option one by one:

Option A: Correct
-Option A signifies that household indebtedness by middle-income households may have compelled spending to reduce before the recession. Hence option A is the correct answer. 

Option B: Incorrect
-Option B states the present situation. The argument is concerned about whether household indebtedness caused the recent recession that happened. Hence option B is incorrect.

Option C: Incorrect
-Option C implies about low-income households did during the recent recession. But the argument is concerned about the cause of the current recession which logically occurred before the recession. Hence option C is irrelevant.

Option D: Incorrect
-Option D is incorrect as it states about the affluent do during a recession

Option E: Incorrect
-Option E compares household debt with other kinds of debt in terms of the possibility to affect the economy. Hence option E is incorrect. 

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