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Passage 95
The function of capital markets is to facilitate an exchange of funds among all
participants, and yet in practice we find that certain participants are not on a par with
others. Members of society have varying degrees of market strength in terms of
information they bring to a transaction, as well as of purchasing power and
creditworthiness, as defined by lenders.
For example, within minority communities, capital markets do not properly fulfill their
functions; they do not provide access to the aggregate flow of funds in the United
States. The financial system does not generate the credit or investment vehicles needed
for underwriting economic development in minority areas. The problem underlying this
dysfunction is found in a rationing mechanism affecting both the available alternatives
for investment and the amount of financial resources. This creates a distributive
mechanism. penalizing members of minority groups because of their socioeconomic
differences from others. The existing system expresses definite socially based
investment preferences that result from the previous allocation of income and that
influence the allocation of resources for the present and future. The system tends to
increase the inequality of income distribution. And, in the United States economy, a
greater inequality of income distribution leads to a greater concentration of capital in
certain types of investment.
Most traditional financial-market analysis studies ignore financial markets' deficiencies in
allocation because of analysts' inherent preferences for the simple model of perfect
competition. Conventional financial analysis pays limited attention to issues of market
structure and dynamics, relative costs of information, and problems of income
distribution. Market participants are viewed as acting as entirely independent and
homogeneous individuals with perfect foresight about capital-market behavior. Also, it
is assumed that each individual in the community at large has the same access to the
market and the same opportunity to transact and to express the preference appropriate
to his or her individual interest. Moreover, it is assumed that transaction costs for
various types of financial instruments (stocks, bonds, etc.) are equally known and equally
divided among all community members.
1. The main point made by the passage is that
(A) financial markets provide for an optimum allocation of resources among all
competing participants by balancing supply and demand
(B) the allocation of financial resources takes place among separate individual
participants, each of whom has access to the market
(C) the existence of certain factors adversely affecting members of minority groups
shows that financial markets do not function as conventional theory says they function
(D) investments in minority communities can be made by the use of various
alternative financial instruments, such as stocks and bonds
(E) since transaction costs for stocks, bonds, and other financial instruments are not
equally apportioned among all minority-group members, the financial market is
subject to criticism.
2. The passage states that traditional studies of the financial market overlook
imbalances in the allocation of financial resources because
(A) an optimum allocation of resources is the final result of competition among
participants
(B) those performing the studies choose an oversimplified description of the
influences on competition
(C) such imbalances do not appear in the statistics usually compiled to measure the
market’s behavior
(D) the analysts who study the market are unwilling to accept criticism of their
methods as biased
(E) socioeconomic difference form the basis of a rationing mechanism that puts
minority groups at a disadvantage
3. The author’s main point is argued by
(A) giving examples that support a conventional generalization
(B) showing that the view opposite to the author’s is self-contradictory
(C) criticizing the presuppositions of a proposed plan
(D) showing that omissions in a theoretical description make it inapplicable in certain
cases
(E) demonstrating that an alternative hypothesis more closely fits the data
4. A difference in which of the following would be an example of inequality in
transaction costs?
(A) Maximum amounts of loans extended by a bank to businesses in different areas
(B) Fees charged to large and small investors for purchasing stocks
(C) Prices of similar goods offered in large and small stores in an area
(D) Stipends paid to different attorneys for preparing legal suits for damages
(E) Exchange rates in dollars for currencies of different countries
5. Which of the following can be inferred about minority communities on the basis of
the passage?
(A) They provide a significant portion of the funds that become available for
investment in the financial market.
(B) They are penalized by the tax system, which increases the inequality of the
distribution of income between investors and wage earners.
(C) They do no receive the share of the amount of funds available for investment
that would be expected according to traditional financial-market analysis.
(D) They are not granted governmental subsidies to assist in underwriting the cost
of economic development.
(E) They provide the same access to alternative sources of credit to finance
businesses as do majority communities.
6. According to the passage, a questionable assumption of the conventional theory
about the operation of financial markets is that
(A) creditworthiness as determined by lenders is a factor determining market access
(B) market structure and market dynamics depend on income distribution
(C) a scarcity of alternative sources of funds would result from taking socioeconomic
factors into consideration
(D) those who engage in financial-market transactions are perfectly well informed
about the market
(E) inequalities in income distribution are increased by the functioning of the
financial market
7. According to the passage, analysts have conventionally tended to view those who
participate in financial market as
(A) judging investment preferences in terms of the good of society as a whole
(B) influencing the allocation of funds through prior ownership of certain kinds of
assets
(C) varying in market power with respect to one another
(D) basing judgments about future events mainly on chance
(E) having equal opportunities to engage in transactions
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