Overview

You know the drill—you’re given a passage to read and then a few passage-based questions to answer. Your task is to understand the passage’s substance and logical structure. The reading comprehension passages you’ll see on the GMAT are usually between 200 and 350 words in length; three or more questions follow. Topics from the social sciences, physical or biological sciences, and business-related areas (marketing, economics, human resource management, etc.) are discussed. The questions ask about the main idea of the passage, the author’s purpose, attitude or tone, logical inferences that can be drawn, etc.

All questions can be answered on the basis of what is stated or implied in the text, so specific knowledge of the material is not required. Interpretive, applied, and inferential questions measure the test-taker’s ability to understand, analyze, and apply information and concepts presented in written form.

This section evaluates the test-taker’s ability to:

  • Understand words and statements in reading passages. Questions of this type test your ability to use contextual clues to help define otherwise ambiguous terms.
  • Understand the logical relationships between significant points and concepts in the reading passages. Test-takers must determine the strong and weak points of an argument, and/or evaluate the importance of arguments and ideas in a passage.
  • Draw inferences from facts and statements in the reading passages. Test-takers consider an author’s assertions and, on the basis of information revealed in the passage, reach general conclusions regarding the validity of those assertions.

Passage

The first American stock exchange originated in 1792, when 24 brokers wrote and signed the Buttonwood Tree Agreement. The agreement was drafted in response to the lack of organization that plagued the colonial economy. It was the first attempt to regulate the American market. The futures or commodities exchange was a separate trading platform that emerged from the need for regulated trading practices in agricultural communities. This market would not be standardized until 1848, when the Chicago Board of Trade was founded. The futures market facilitates the trade of contracts: agreements that guarantee the buyer a price for a future delivery of goods. Although in many ways, the futures market was more stable than the stock market, early investors were more skeptical of the futures market primarily because it was a ripe environment for speculators to trade and sell.

In the nineteenth century, investors looked down on futures traders, viewing them as market manipulators who engaged in wanton speculation. What these investors did not realize was that similar criticisms were levied against the stock market when it was first established in the United States. At the stock market’s inception, wild speculation and price gouging ran rampant in the US economy. Ironically, the early agrarian futures contracts were crucial in maintaining the stability of the US market economy and were specifically designed to reduce the risk for producers. In fact, the very speculators who were so feared by nineteenth century investors actually made the market more efficient and kept prices stable. Futures contracts were standardized as to the quantity, quality, location and time of delivery for each commodity that was bought or sold. Both the standardized nature of futures contracts and the haggling over price by speculators, who incurred the most investment risk, guaranteed that the futures contracts would be bought and sold at fair prices. It was only in the twentieth century that investors began to understand how the standard mechanisms of the futures markets could also serve the stock market.

 

Question 1

The author’s main point is that

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Answer & Explanation

The question asks for the main point of the passage. The passage discusses the emergence of the U.S. futures market, noting that early investors were more skeptical of the futures market, but that futures contracts were crucial in maintaining the stability of the US market economy. The answer should capture this contrast.

Choice C expresses both early investors’ distrust of the futures market and the market’s stabilizing effect. Choice C is correct.

Choice A fails to discuss investors’ distrust of the futures market or the stabilizing influence of the futures market.  Choice B suggests that the futures market prevented speculation; this is contradicted by the passage.

Choice D notes that nineteenth-century investors did not understand the risks of the stock market; however, the passage centers on their misunderstanding of the futures market, not the stock market.

Choice E suggests that the futures market worked in the same way as the stock market. While the passage suggests that standard mechanisms of the futures markets could also serve the stock market, it does not suggest that the mechanisms of the two markets are "fundamentally the same."

Passage

The first American stock exchange originated in 1792, when 24 brokers wrote and signed the Buttonwood Tree Agreement. The agreement was drafted in response to the lack of organization that plagued the colonial economy. It was the first attempt to regulate the American market. The futures or commodities exchange was a separate trading platform that emerged from the need for regulated trading practices in agricultural communities. This market would not be standardized until 1848, when the Chicago Board of Trade was founded. The futures market facilitates the trade of contracts: agreements that guarantee the buyer a price for a future delivery of goods. Although in many ways, the futures market was more stable than the stock market, early investors were more skeptical of the futures market primarily because it was a ripe environment for speculators to trade and sell.

In the nineteenth century, investors looked down on futures traders, viewing them as market manipulators who engaged in wanton speculation. What these investors did not realize was that similar criticisms were levied against the stock market when it was first established in the United States. At the stock market’s inception, wild speculation and price gouging ran rampant in the US economy. Ironically, the early agrarian futures contracts were crucial in maintaining the stability of the US market economy and were specifically designed to reduce the risk for producers. In fact, the very speculators who were so feared by nineteenth century investors actually made the market more efficient and kept prices stable. Futures contracts were standardized as to the quantity, quality, location and time of delivery for each commodity that was bought or sold. Both the standardized nature of futures contracts and the haggling over price by speculators, who incurred the most investment risk, guaranteed that the futures contracts would be bought and sold at fair prices. It was only in the twentieth century that investors began to understand how the standard mechanisms of the futures markets could also serve the stock market.

 

Question 2

Which of the following generalizations regarding trading platforms would the author of the passage most likely agree?

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Answer & Explanation

The author discusses two "trading platforms": the stock market and the futures market. The answer should be a general statement that fits the author’s discussion of both of these.

Choice A states that trading platforms that trade contracts are more stable than those that trade stocks. The passage states that the early U.S. futures market in particular was more stable than investors believed it to be; however, the fact that the standard mechanisms of the futures markets could also serve the stock market suggests that contract markets are not necessarily more stable than stock markets.

Choice B states that trading platforms must exist in order for an economy to prosper; this is beyond the scope of the passage, which discusses only an economy in which such platforms exist.

Choice C states that trading platforms were established to standardize practices. The passage states that the stock market was regulated in response to the lack of organization that plagued the colonial economy.  We’re also told that the futures market emerged from the need for regulated trading practices.  Choice C looks good.

Choice D compares modern platforms to early platforms; the passage does not discuss modern platforms.

Choice E suggests that markets permit speculation only when it is necessary. Although the passage provides evidence that speculation is beneficial to markets, there is no indication that it is necessary.

Choice C is correct.

Passage

The first American stock exchange originated in 1792, when 24 brokers wrote and signed the Buttonwood Tree Agreement. The agreement was drafted in response to the lack of organization that plagued the colonial economy. It was the first attempt to regulate the American market. The futures or commodities exchange was a separate trading platform that emerged from the need for regulated trading practices in agricultural communities. This market would not be standardized until 1848, when the Chicago Board of Trade was founded. The futures market facilitates the trade of contracts: agreements that guarantee the buyer a price for a future delivery of goods. Although in many ways, the futures market was more stable than the stock market, early investors were more skeptical of the futures market primarily because it was a ripe environment for speculators to trade and sell.

In the nineteenth century, investors looked down on futures traders, viewing them as market manipulators who engaged in wanton speculation. What these investors did not realize was that similar criticisms were levied against the stock market when it was first established in the United States. At the stock market’s inception, wild speculation and price gouging ran rampant in the US economy. Ironically, the early agrarian futures contracts were crucial in maintaining the stability of the US market economy and were specifically designed to reduce the risk for producers. In fact, the very speculators who were so feared by nineteenth century investors actually made the market more efficient and kept prices stable. Futures contracts were standardized as to the quantity, quality, location and time of delivery for each commodity that was bought or sold. Both the standardized nature of futures contracts and the haggling over price by speculators, who incurred the most investment risk, guaranteed that the futures contracts would be bought and sold at fair prices. It was only in the twentieth century that investors began to understand how the standard mechanisms of the futures markets could also serve the stock market.

 

Question 3

The author discusses early agrarian futures contracts in order to

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Answer & Explanation

Agrarian futures contracts are discussed in the second paragraph of this passage: Ironically, the early agrarian futures contracts were crucial in maintaining the stability of the US market economy and were specifically designed to reduce the risk for producers. These contracts show that the futures market was actually a stabilizing influence that was good for producers, in spite of investors’ distrust of "speculation" by futures traders.

Choice A suggests that this example serves to illustrate how contracts made speculative trading effective. This is a reasonable idea, but it fails to capture the force of the word ironically. This example is meant to debunk a misconception, not just to support a point.

Choice B states that this example refutes the view that speculation compromises the stability and integrity of the futures market. This effectively captures how this example functions, as well as the the contrast indicated by ironically. Choice B is correct.

Choice C is contradicted by the passage; the stock market was more widely accepted by investors than was the early futures market.

Choices D states that futures trading mechanisms can be applied to the stock market, and choice E states that speculation was important to the US economy. Both are supported by the passage in general, but are not related to the point that the author makes in this particular example.