CAT 2025 Slot 1 · VARC · RC passage 3: Income Inequality and Economic Growth

The passage defines the term for us: 'when democratization extends suffrage to a wider class of people'. So the opposite must be a narrowing of suffrage and of political participation.

Option 1 describes suffrage narrowing and opposition parties being deregistered under a shift to authoritarianism. Both the mechanism and the direction are the exact reverse of the passage's definition.

Option 2 describes capping corporate donations and public funding of parties – measures that reduce the weight of money in politics. That is a widening of fair participation, so the label 'oligarchy' attached to it does not match the action described.

Option 3 describes participatory budgeting and recall elections, which are more democratic participation, not less, whatever the press release calls it.

Option 4 describes term limits and stronger judicial review, both checks on concentrated power, so the stated purpose of entrenching autocratic rule contradicts the measures named.

Shortcut: three of the four options deliberately pair a democratic-looking action with an undemocratic-sounding label. Ignore the labels and read only the actions; just one option has an action that actually restricts participation.

Hence, the answer is option 1.

Isolate the second argument from paragraph 1: because effort is unobservable, 'paying compensations without taking into account the economic performance achieved by individual agents will fail to elicit optimum effort'. The remedy implied is pay tied to measurable performance, which creates income differences and raises effort.

Option 3 is that remedy stated as a design – rewards paid on verifiable performance. It produces inequality and raises growth through exactly the channel the argument describes.

Option 1 enlarges top incomes 'without linking pay to results'. It creates inequality but severs the link to effort, which is precisely the case the argument says fails.

Option 2 pays by tenure rather than output. That is compensation ignoring performance, the very thing the passage warns against.

Option 4 is a real argument in the passage, but it is the third one – the corporate governance argument about concentrated ownership. The question asks specifically about the incentive or moral hazard argument, so this is the classic trap of a true statement answering the wrong question.

Shortcut: the question names one of three arguments. Locate that argument's paragraph marker ('The second argument is related to moral hazard and incentives') and answer only from the lines that follow it; options drawn from the neighbouring arguments are distractors by design.

Hence, the answer is option 3.

List the three arguments and the condition each one attaches to. First: investment indivisibilities – wealth concentration is needed where sunk costs are large and financial institutions are absent. Second: moral hazard – pay must track performance for effort to be optimal. Third: corporate governance – concentrated stock ownership permits quick decisions and better monitoring.

Also note the time qualifier the passage attaches to the evidence: inequality has 'a positive impact on economic growth in the short run, but the two are negatively correlated in the long run'.

Option 1 names all three settings – high sunk costs, incentive alignment, concentrated ownership – and keeps the short-term qualifier. It matches both the structure and the hedge.

Option 2 drops every condition with 'in every period and type of economy, regardless of finance or governance conditions'. The passage explicitly makes the effect conditional and short-run, so this overstates.

Option 3 reverses the third argument. The passage says dispersed ownership makes quick decisions harder and causes a free-rider problem.

Option 4 is about mature stock markets making concentration unnecessary, which inverts the first argument – the passage's point is that concentration is needed where such markets are absent.

Shortcut: when a question asks for the function of a block of three arguments, the answer almost always has three matching elements. Only option 1 has three, and it is also the only one that preserves the passage's short-run hedge.

Hence, the answer is option 1.

The passage has two halves. The first gives three channels by which inequality may help growth – investment indivisibilities, incentives, corporate governance – with evidence that the gain is short-run. The second half reports the larger body of studies finding a negative relation, through human capital, fertility, political instability and social capital.

Option 3 carries both halves: the three channels, the short-term gains, and the long-term drawbacks. That is the summary.

Option 1 claims the passage 'confines its discussion' to financing and corporate control and 'overlook[s]' human capital, fertility and redistribution. The second paragraph discusses all three at length, so the option is simply false about the passage.

Option 2 says the passage 'argues that income inequality accelerates economic growth' without any qualifier. The passage reports that effect as short-run only and devotes its whole second half to the opposite finding, so this is a misstatement of stance.

Option 4 turns the passage into a methodological argument it never makes. The passage reports findings; it does not claim that other evaluations are misguided.

Shortcut: in a two-part passage – case for, then case against – the correct summary must contain a hinge word such as 'while', 'but' or 'noting'. Options with only one direction are incomplete by construction.

Hence, the answer is option 3.