Although the European Central Bank (ECB) is Subject to Far More Constraints GMAT Reading Comprehension

Reading Passage Question

Although the European Central Bank (ECB) is subject to far more constraints than the central banks of single nations, the ECB played a central role in creating the economic growth now enjoyed by the European Union. However, the flaws within the European Union’s monetary system remain and must be addressed. The world financial crisis of the early twenty-first century highlighted three shortcomings that deserve attention.

First, while the European Union centralized money creation in the ECB, the countries of the Union were left with the responsibility of managing their own national budgets. So, at the start of the crisis, governments of the eurozone could not print money to pay creditors. As the crisis worsened, markets began to panic because of the perceived risk of governmental default, and this pressure raised borrowing costs. The ECB stepped in, announcing that it would buy government bonds to maintain control of monetary policy. This action calmed the panic and ended the most acute phase of the crisis.

The second flaw became clear over the next several years, as the eurozone economy languished in recession. The ECB was constrained by its mandate and could not purchase certain assets to stimulate the economy. Other central banks had begun this process much earlier and were able to attenuate the recession in their respective nations.

The final flaw may be the most serious. Although the charter governing the ECB was negotiated by eurozone governments, the ECB is seen by many as a powerful, but unelected, institution that inflicted severe economic pain upon the citizens of its member nations. Recent elections in eurozone countries have seen an increase in the representation of nationalist parties that are increasingly calling for returning control of their country’s currency to the nation itself.

While the founding nations cannot be criticized for failing to foresee the nature and depth of the economic crisis, and thus not structuring European Union monetary policy to cope effectively with such a shock, now that the vulnerabilities have been revealed, the leadership of member nations must initiate the necessary corrections.

“Although the European Central Bank (ECB) is subject to far more constraints”- 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. Which of the following, if true, would most clearly undermine the author's conclusion?

A) Eurozone nations are spending an increasing percentage of their national budgets on social welfare programs that benefit all citizens equally.
B) Making any changes in European Union monetary policy during times of economic expansion may disrupt the markets and threaten the long-term stability of the European Central Bank.
C) The heads of many European Union nations are discussing revisions to the charter that established the role and responsibilities of the European Central Bank.
D) The nationalist parties that have won elections in many eurozone countries would earn greater popular support if their positions regarding monetary policy were enacted.
E) Most voters in the European Union agree there is growing inequality between the economies of the richest and poorest nations served by the European Central Bank.

2. The passage suggests which of the following about the role of European Union money creation policy during the economic crisis of the early twenty-first century?

A) If the European Central Bank had been able to print currency at the beginning of the crisis, the recession could have been avoided.
B) Since printing more currency leads to inflation, limiting this power to the European Central Bank contributed to a shorter, less severe recession in European Union countries.
C) If member nations had properly managed their budgets, the European Central Bank would not have had to issue bonds to assuage the panic in the markets.
D) The flaws in European Union money creation policy prevented the European Central bank from having any beneficial effects on the economy.
E) Although the recovery in the eurozone may have been delayed, European Union money creation policy eventually demonstrated considerable success.

3. The passage suggests which of the following about elections in the European Union?

A) When economic issues appear on the ballot, they must address the needs of every nation in the European Union and so are usually too complex to be understood readily by most voters.
B) Measures allowing democratic input into monetary policies, especially those governing the European Central Bank, are not included on the ballot often enough to satisfy some voters.
C) Reforms of European Union monetary policy have failed to obtain sufficient votes to be approved in the past, but they now enjoy increased support due to the flaws revealed by the financial crisis.
D) Since the influence of nationalist parties is growing, control of national economic policy is expected to soon revert to the individual nations.
E) When voters are able to vote on European Union monetary policy, extensive revisions to the charter that governs the European Central Bank will be made.

4. Which of the following best describes the function of the second sentence in the third paragraph?

A) To contrast restrictions on the actions of the European Central Bank with the latitude afforded other banks
B) To describe restrictions imposed by voters on the European Central Bank
C) To illustrate the inability of the European Central Bank to sell the necessary assets to stimulate the economy
D) To describe the process by which other central banks were able to mitigate the recession in their respective nations
E) To explain the primary reason the European Central Bank struggled to control the effects of the financial crisis

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