CAT 2026 Slot 2 VARC Q3: Evidence based

Passage 1

READ THE PASSAGE AND ANSWER THE QUESTIONS THAT FOLLOW.

Studies showing that income inequality plays a positive role in economic growth are largely based on three arguments. The first argument focuses on investment indivisibilities wherein large sunk costs are required when implementing new fundamental innovations. Without stock markets and financial institutions to mobilize large sums of money, a high concentration of wealth is needed for individuals to undertake new industrial activities accompanied by high sunk costs . . . [One study] shows the relation between economic growth and income inequality for 45 countries during 1966-1995. [It was found] that the increase in income inequality has a significant positive relationship with economic growth in the short and medium term. Using system GMM, [another study estimated] the relation between income inequality and economic growth for 106 countries during 1965–2005 period. The results show that income inequality has a positive impact on economic growth in the short run, but the two are negatively correlated in the long run. The second argument is related to moral hazard and incentives . . . Because economic performance is determined by the unobservable level of effort that agents make, paying compensations without taking into account the economic performance achieved by individual agents will fail to elicit optimum effort from the agents. Thus, certain income inequalities contribute to growth by enhancing worker motivation . . . and by giving motivation to innovators and entrepreneurs . . . Finally, [another study] point[s] out that the concentration of wealth or stock ownership in relation to corporate governance contributes to growth. If stock ownership is distributed and owned by a large number of shareholders, it is not easy to make quick decisions due to the conflicting interests among shareholders, and this may also cause a free-rider problem in terms of monitoring and supervising managers and workers. . . .

Various studies have examined the relationships between income inequality and economic growth, and most of these assert that a negative correlation exists between the two. . . . Analyzing 159 countries for 1980–2012, they conclude that there exists a negative relation between income inequality and economic growth; when the income share of the richest fifth of the population increases by 1%, the GDP decreases by 0.08%, whereas when the income share of the poorest fifth of the population increases by 1%, the GDP increases by 0.38%. Some studies find that income inequality has a negative impact on growth due to poor human capital accumulation and low fertility rates . . . while [others] point out that it creates political instability, resulting in lower investment. . . . [Some economists] argue that widening income inequality has a negative impact on economic growth because it negatively affects social consensus or social capital formation. One important research topic is the correlation between democratization and income redistribution. [Some scholars] explain that social pressure for income redistribution rises as income inequality increases in a democratic society. In other words, when democratization extends suffrage to a wider class of people, the increased political power of low- and middle-income voters results in broader support for income redistribution and social welfare expansion. However . . . if the rich have more political influence than the poor, the democratic system actually worsens income inequality rather than improving it.

MCQ · +3 / −1 · easy

The passage refers to “democratization”. Choose the one option below that comes closest to the opposite of this process.

Answer and solution

Correct answer: C

Solution

Answer: C — After the emergency decree, the regime shifted toward authoritarianism as suffrage narrowed and opposition parties were deregistered.

1. The passage defines democratisation through the extension of suffrage and increased influence for lower- and middle-income voters.
2. Its opposite must reduce participation or concentrate political power.
3. C explicitly narrows suffrage and removes opposition parties from registration. These actions match the opposite process.
4. A, B and D attach authoritarian labels to measures that do not themselves clearly reverse democratisation. Evaluate actions, not the labels used by a press release.
5. Answer: C.

Detailed reasoning and elimination check:
Identify the change in who can participate. Extending suffrage broadens participation; narrowing suffrage and excluding opposition do the reverse. The labels totalitarian or oligarchic in a distractor cannot override what its described actions actually do.

G Strategy shortcut

Spot: Identify the exact question task and the relevant passage claim.
Apply: Reverse the defining action: wider voting rights becomes narrower voting rights. C.
Check: Identify the change in who can participate. Extending suffrage broadens participation; narrowing suffrage and excluding opposition do the reverse. The labels totalitarian or oligarchic in a distractor cannot override what its described actions actually do.

G Strategy: Spot: Identify the exact question task and the relevant passage claim. Apply: Reverse the defining action: wider voting rights becomes narrower voting rights. C. Check: Identify the change in who can participate. Extending suffrage broadens participation; narrowing suffrage and excluding opposition do the reverse. The labels totalitarian or oligarchic in a distractor cannot override what its described actions actually do.

An expected paper by Cetking, not the actual CAT paper. CAT is conducted by the IIMs.