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 a two or more 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 would reduce the overall 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, some points 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 20% of population increases by 1%, the GDP decreases by 0.8%; whereas when the income share of the poorest 20% of population increases by 1%, the GDP increases by 0.38%. Some studies find that inequality has a negative impact on growth due to poor human capital accumulation and low fertility rates, while others point out that inequality 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, democratization extends suffrage to 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.
Which one of the options below best summarises the passage?
Show Hint
- The passage claims that evaluating the effect of income inequality on economic growth without considering both short- and long- term consequences is misguided.
- The passage confines its discussion to financing gaps and corporate control while undercutting cross-country evidence and overlooking the significance of concerns regarding human capital accumulation, fertility rates, and income redistribution under democratisation.
- The passage argues that income inequality accelerates economic growth while also emphasising the significance of concerns regarding human capital accumulation, fertility rates, and political instability.
- The passage outlines investment, incentive, and governance channels through which income inequality may support economic growth and reports short-term gains while noting long-term drawbacks.
The Correct Option is D
Solution and Explanation
Step 1: Identify the main structure of the passage. & nbsp;
The passage presents:
- Three mechanisms through which inequality may promote growth:
- Investment indivisibilities
- Incentives/moral hazard
- Governance and ownership concentration
- Empirical findings:
- Short-run positive relationship between inequality and growth
- Long-run negative relationship
- Counter-arguments:
- Inequality harms growth via human-capital effects, fertility, political instability, and pressures for redistribution
Thus, the passage is not taking a side; it outlines channels supporting growth, but also discusses long-term disadvantages and negative correlations.
Step 2: Evaluate the options.
- Option (1): Too narrow. The passage does mention timeframes, but it also discusses mechanisms and counterarguments extensively.
- Option (2): Incorrect. The passage does not confine itself to financing gaps and governance; it explicitly includes incentives, political stability, redistribution, fertility, and human capital.
- Option (3): Incorrect. The passage does not argue that inequality accelerates growth overall — it shows both positive mechanisms and significant negative effects.
- Option (4): Correct.
It accurately captures:
- The three positive channels (investment, incentives, governance)
- The reporting of short-term gains
- The acknowledgment of long-term drawbacks and negative correlations
Conclusion:
Therefore, Option (4) best summarises the passage.
The passage refers to "democratization". Choose the one option below that comes closest to the opposite of this process.
Show Hint
- After the emergency decree, the regime shifted toward authoritarianism as suffrage narrowed and opposition parties were deregistered.
- Corporate donations were capped and parties received public funding which was portrayed as establishing an oligarchy.
- Municipalities adopted participatory budgeting and recall elections which a press release called totalitarianism.
- The coalition imposed term limits and strengthened judicial review in order to further entrench autocratic rule.
The Correct Option is A
Approach Solution - 1
The question asks for the option that is the opposite of "democratization." Democratization refers to the process of making a system or organization more democratic, typically by increasing participation and representation in decision-making processes, such as extending suffrage or enhancing the power of elected bodies.
Now, let's examine the given options to find the one that is the opposite of democratization:
- After the emergency decree, the regime shifted toward authoritarianism as suffrage narrowed and opposition parties were deregistered. This option describes a shift toward authoritarianism, characterized by reduced suffrage (voting rights) and deregistration of opposition parties. This is the opposite of democratization, which involves increasing political participation and representation.
- Corporate donations were capped and parties received public funding which was portrayed as establishing an oligarchy. This option discusses changes in party funding, which does not directly oppose democratization as it can be perceived in various ways depending on the context.
- Municipalities adopted participatory budgeting and recall elections which a press release called totalitarianism. This option describes actions like participatory budgeting and recall elections, which are actually elements of democratization, as they increase citizen involvement. The label "totalitarianism" in this context seems incorrect or misleading.
- The coalition imposed term limits and strengthened judicial review in order to further entrench autocratic rule. This option describes imposing term limits and strengthening judicial review, which could be seen as mechanisms for promoting checks and balances, typical of democratic processes, although the intention stated is to entrench autocracy. However, the direct actions mentioned align more with democratizing efforts compared to the first option.
Conclusion: The first option, "After the emergency decree, the regime shifted toward authoritarianism as suffrage narrowed and opposition parties were deregistered," is the one that most directly opposes democratization, as it involves a move toward authoritarianism and decreases in political participation and representation.
Approach Solution -2
Step 1: What is democratization in the passage? & nbsp;
The passage explains democratization as a process that:
- Widens suffrage,
- Increases political participation,
- Empowers low- and middle-income voters.
So the opposite of democratization would involve:
- Restricting suffrage,
- Reducing political participation,
- Suppressing opposition.
Step 2: Evaluate the options.
- Option (1): ✔️ Describes a shift toward authoritarianism: suffrage narrowed, opposition parties were deregistered. This is the clearest opposite of democratization.
- Option (2): ✖️ Capping donations and providing public funding is not the opposite of democratization; it is a campaign finance reform.
- Option (3): ✖️ Participatory budgeting and recall elections actually increase democratic participation, even if mislabeled as totalitarianism.
- Option (4): ✖️ While it mentions “entrenching autocratic rule,” term limits and stronger judicial review normally reduce concentration of power, making the description contradictory and unclear.
Conclusion:
Thus, Option (1) best represents the opposite of democratization.
The primary function of the three-part case for a positive income inequality–economic growth link in the first half of the passage is to show that:
Show Hint
- inequality boosts growth in every period and type of economy, regardless of finance or governance conditions.
- mature stock markets make wealth concentration unnecessary, yet they might still be harmful to investment.
- inequality can aid short-term growth in settings with high sunk costs, incentive alignment, and concentrated ownership.
- dispersed ownership speeds corporate decision-making and removes free rider problems.
The Correct Option is C
Approach Solution - 1
To solve the given question, we must determine the main function of the three-part case for a positive income inequality–economic growth link in the passage. Let's analyze each component and how it contributes to the idea that income inequality can have a positive effect on economic growth under certain conditions.
- Investment Indivisibilities: The passage states that high concentrations of wealth are necessary to undertake new industrial activities that involve substantial sunk costs when there is a lack of developed financial markets. This is because mobilizing large sums of money through stock markets or financial institutions is not feasible. Thus, in such settings, a concentration of wealth (inequality) facilitates investment and economic growth.
- Moral Hazard and Incentives: Economic performance relies on agents' efforts, often unobservable. A certain degree of income inequality can stimulate growth by motivating workers, innovators, and entrepreneurs to maximize their efforts through appropriate compensation aligned with performance.
- Corporate Governance: The concentration of stock ownership can contribute to growth by simplifying decision-making processes and reducing free-rider problems. A dispersed ownership leads to conflicting shareholder interests, which impede quick decisions and effective supervision.
From the analysis, the primary function of the arguments in the first half of the passage is to illustrate how inequality aids short-term economic growth. Specifically, it emphasizes settings where there are high sunk costs, need for incentive alignment, and benefits from concentrated ownership in the economy. Therefore, the correct answer is:
inequality can aid short-term growth in settings with high sunk costs, incentive alignment, and concentrated ownership.
Other answer choices do not accurately capture the essence of the arguments presented:
- The option “inequality boosts growth in every period and type of economy...” is incorrect because the passage suggests conditions and specific settings where this occurs, not universally.
- The option “mature stock markets make wealth concentration unnecessary...” is not supported explicitly by the passage and does not align with the argument of needing concentration due to the lack of such markets.
- The option “dispersed ownership speeds corporate decision-making...” contradicts the passage, which argues that dispersion leads to delayed decisions and free-rider issues.
Approach Solution -2
Step 1: Identify what the three-part case in the first half of the passage argues. & nbsp;
The passage presents three channels through which inequality might support economic growth:
- Investment indivisibilities: high sunk costs require concentrated wealth.
- Incentives and moral hazard: inequality motivates effort, innovation, and entrepreneurship.
- Corporate governance: concentrated ownership improves monitoring and decision-making.
Step 2: Understand why these are mentioned.
These mechanisms are used to show why inequality might have a positive effect, especially in the short run, which is consistent with the empirical findings the passage reports (short-run positive, long-run negative).
Step 3: Evaluate the options.
- Option (1): Incorrect. The passage explicitly states that positive effects may be short-term and do not hold universally or in the long run.
- Option (2): Incorrect. This reverses the argument — the passage says concentrated ownership can be beneficial, not unnecessary.
- Option (3): Correct. It accurately captures that inequality may aid short-term growth in contexts where:
- high sunk costs,
- incentive needs,
- and concentrated ownership
- Option (4): Incorrect. The passage says dispersed ownership creates free-rider problems and slows decisions, not the opposite.
Conclusion:
Thus, the correct answer is Option (3).
According to the incentive or moral hazard argument, which one of the designs below is most consistent with the claim that some inequality can raise growth?
Show Hint
- Pay rewards on verifiable performance for highly productive workers.
- Rents protected by market power that enlarge top incomes without linking pay to results.
- Wages are determined by tenure rather than output to ensure equity.
- A regime that concentrates stock ownership in relation to corporate governance.
The Correct Option is A
Approach Solution - 1
To determine which option aligns with the incentive or moral hazard argument regarding how certain inequalities can promote growth, we must analyze the provided options in the context of economic principles and studies discussed in the comprehension text.
- Pay rewards on verifiable performance for highly productive workers: This option aligns with the moral hazard and incentive perspective. According to the comprehension, rewarding workers based on tangible performance indicators encourages individuals to exert higher effort levels since their compensation is linked directly to their output. This behavior enhancement leads to greater economic productivity and growth because employees are motivated to optimize their performance. Therefore, this option is most consistent with the notion that some inequality can lead to growth through improved incentives.
- Rents protected by market power that enlarge top incomes without linking pay to results: This scenario can increase income inequality but does not necessarily promote growth. It involves income gains without corresponding productivity increases, thereby leading to inefficiencies rather than incentivizing superior performance.
- Wages are determined by tenure rather than output to ensure equity: This approach prioritizes equity and fairness over performance incentives. It may lead to economic stagnation rather than growth, as there is little motivation for workers to increase output or efficiency.
- A regime that concentrates stock ownership in relation to corporate governance: This option could theoretically improve corporate decision-making and oversight but is less directly related to the incentive structure for individual workers. It focuses more on governance efficiency rather than direct incentives linked to personal productivity.
Based on this analysis, option one, "Pay rewards on verifiable performance for highly productive workers," is the most suitable answer. It incorporates economic theory regarding incentives and moral hazard, suggesting that linking income to performance can enhance effort and productivity, leading to overall economic growth.
Approach Solution -2
Step 1: Recall the moral hazard / incentive argument from the passage. & nbsp;
The passage explains that:
“Because economic performance is determined by the unobservable level of effort that agents make, paying compensations without taking into account performance will fail to elicit optimum effort. Thus, certain income inequalities contribute to growth by enhancing worker motivation and by rewarding innovators and entrepreneurs.”
So, inequality linked to performance-based rewards can raise growth by incentivising effort and innovation.
Step 2: Evaluate the options.
- Option (1): ✔ Correct. Paying rewards based on verifiable performance aligns incentives with effort, exactly matching the moral hazard argument.
- Option (2): ✖ Incorrect. Market-power-based rents increase incomes without linking them to performance — the passage explicitly states this fails to elicit optimal effort.
- Option (3): ✖ Incorrect. Tenure-based wages ignore performance; this contradicts the incentive argument.
- Option (4): ✖ Incorrect. Concentrated ownership relates to the corporate governance argument, not the incentive/moral hazard argument.
Conclusion:
Thus, the option most consistent with the incentive argument is Option (1).
Top Questions on Reading Comprehension
- Shown below are letters ‘e’ taken from four popular logos, arranged in a sequence. Which of the options is the correct sequence?
- UCEED - 2026
- English Language Comprehension
- Reading Comprehension
- Shown below are four options, each showing consecutive frames representing the movement of a pendulum of an old-style wall clock for an animation movie. Which is the correct option?
- UCEED - 2026
- English Language Comprehension
- Reading Comprehension
- Acrucial moderating factor in how people experience comparisons is self-esteem. Individuals with high self-esteem are more likely to interpret upward comparison as informative rather than threatening. They are more resilient in the face of others’ success and more likely to believe they can reach their own goals. In contrast, people with low self-esteem are more prone to interpret comparison as judgment, reinforcing negative self-views and triggering feelings of inadequacy.
This dynamic creates a self-reinforcing loop. People with high self-esteem are less vulnerable to upward comparison, which intensifies those doubts. Those with a secure sense of self are more likely to use comparison as a learning tool. The same external stimulus—a colleague’s achievements, a friend’s popularity—can have radically different effects depending on internal stability.
Self-esteem also influences how people choose their comparison targets. Research has found that individuals often engage in “selective comparison,” seeking out those who confirm their existing beliefs about themselves. This can become a subtle form of self-sabotage. Someone who feels unworthy may subconsciously seek out targets that reinforce that sense, perpetuating a narrative of inferiority. One of the most promising antidotes to social comparison is temporal comparison—evaluating oneself not against others, but against one’s own past. This method has been shown to increase motivation and satisfaction, especially when individuals can see concrete progress. Temporal comparison activates the same reward circuits as social comparison but avoids the threat systems associated with social ranking. It also reinforces agency: individuals focus on what they can control and improve rather than what others control. In therapeutic and coaching settings, temporal comparison is used to help clients build self-efficacy and track growth over time.
Moreover, people who focus on self-improvement rather than social dominance are less likely to fall into cycles of envy or self-pity. They can still use others as inspiration, but they do so without attaching their self-worth to the outcome. This is not to say they never compare—but that they focus on learning, rather than judgment. The most skilful approach to comparison may lie in eliminating it, but in reframing it as feedback. When we interpret comparison as information rather than a verdict, we can ask, “What can I learn from this?” This shift turns comparison into a growth tool. Teachers mentor their students, not as rivals. Psychologists emphasize that the key variable here is mindset.
A fixed mindset sees comparison as a threat. If someone else is better, it means we are worse. A growth mindset sees comparison as a map. If someone else has reached a certain level, it means the path exists. This reframing is not just a cognitive trick. It changes the emotional tone of comparison, making it more likely to inspire than to wound. Reframing also requires emotional regulation—the ability to notice an initial pang of envy or shame without reacting impulsively. With practice, individuals can learn to pause, reflect, and reinterpret their emotional responses. Over time, this builds resilience and self-trust, allowing comparison to become a learning tool rather than a cage.- XAT - 2026
- Verbal and Logical Ability
- Reading Comprehension
When people who are talking don’t share the same culture, knowledge, values, and assumptions, mutual understanding can be especially difficult. Such understanding is possible through the negotiation of meaning. To negotiate meaning with someone, you have to become aware of and respect both the differences in your backgrounds and when these differences are important. You need enough diversity of cultural and personal experience to be aware that divergent world views exist and what they might be like. You also need the flexibility in world view, and a generous tolerance for mistakes, as well as a talent for finding the right metaphor to communicate the relevant parts of unshared experiences or to highlight the shared experiences while demphasizing the others. Metaphorical imagination is a crucial skill in creating rapport and in communicating the nature of unshared experience. This skill consists, in large measure, of the ability to bend your world view and adjust the way you categorize your experiences. Problems of mutual understanding are not exotic; they arise in all extended conversations where understanding is important.
When it really counts, meaning is almost never communicated according to the CONDUIT metaphor, that is, where one person transmits a fixed, clear proposition to another by means of expressions in a common language, where both parties have all the relevant common knowledge, assumptions, values, etc. When the chips are down, meaning is negotiated: you slowly figure out what you have in common, what it is safe to talk about, how you can communicate unshared experience or create a shared vision. With enough flexibility in bending your world view and with luck and charity, you may achieve some mutual understanding.
Communication theories based on the CONDUIT metaphor turn from the pathetic to the evil when they are applied indiscriminately on a large scale, say, in government surveillance or computerized files. There, what is most crucial for real understanding is almost never included, and it is assumed that the words in the file have meaning in themselves—disembodied, objective, understandable meaning. When a society lives by the CONDUITmetaphor on a large scale, misunderstanding, persecution, and much worse are the likely products.- XAT - 2026
- Verbal and Logical Ability
- Reading Comprehension
Later, I realized that reviewing the history of nuclear physics served another purpose as well: It gave the lie to the naive belief that the physicists could have come together when nuclear fission was discovered (in Nazi Germany!) and agreed to keep the discovery a secret, thereby sparing humanity such a burden. No. Given the development of nuclear physics up to 1938, development that physicists throughout the world pursued in all innocence of any intention of finding the engine of a new weapon of mass destruction—only one of them, the remarkable Hungarian physicist Leo Szilard, took that possibility seriously—the discovery of nuclear fission was inevitable. To stop it, you would have had to stop physics. If German scientists hadn’t made the discovery when they did, French, American, Russian, Italian, or Danish scientists would have done so, almost certainly within days or weeks. They were all working at the same cutting edge, trying to understand the strange results of a simple experiment bombarding uranium with neutrons. Here was no Faustian bargain, as movie directors and other naifs still find it intellectually challenging to imagine. Here was no evil machinery that the noble scientists might hide from the problems and the generals. To the contrary, there was a high insight into how the world works, an energetic reaction, older than the earth, that science had finally devised the instruments and arrangements to coart forth. “Make it seem inevitable,” Louis Pasteur used to advise his students when they prepared to write up their discoveries. But it was. To wish that it might have been ignored or suppressed is barbarous. “Knowledge,” Niels Bohr once noted, “is itself the basis for civilization.” You cannot have the one without the other; the one depends upon the other. Nor can you have only benevolent knowledge; the scientific method doesn’t filter for benevolence. Knowledge has consequences, not always intended, not always comfortable, but always welcome. The earth revolves around the sun, not the sun around the earth. “It is a profound and necessary truth,” Robert Oppenheimer would say, “that the deep things in science are not found because they are useful; they are found because it was possible to find them.”
...Bohr proposed once that the goal of science is not universal truth. Rather, he argued, the modest but relentless goal of science is “the gradual removal of prejudices.” The discovery that the earth revolves around the sun has gradually removed the prejudice that the earth is the center of the universe. The discovery of microbes is gradually removing the prejudice that disease is a punishment from God. The discovery of evolution is gradually removing the prejudice that Homo sapiens is a separate and special creation.- XAT - 2026
- Verbal and Logical Ability
- Reading Comprehension
Questions Asked in CAT exam
- The passage given below is followed by four summaries. Choose the option that best captures the essence of the passage.
In the dynamic realm of creativity, artists often find themselves at the crossroads between drawing inspiration from diverse cultures and inadvertently crossing into the territory of cultural appropriation. Inspiration is the lifeblood of creativity, driving artists to create works that resonate across borders. In a globalized era of the modern world, artists draw from a vast array of cultural influences. When approached respectfully, inspiration becomes a bridge, fostering understanding and appreciation of cultural diversity. However, the line between inspiration and cultural appropriation can be thin and easily blurred.
Cultural appropriation occurs when elements from a particular culture are borrowed without proper understanding, respect, or acknowledgment. This leads to the commodification of sacred symbols, the reinforcement of stereotypes, and the erasure of the cultural context from which these elements originated. It is essential to recognize that the impact of cultural appropriation extends beyond the realm of artistic expression, influencing societal perceptions and perpetuating power imbalances.- CAT - 2025
- Para Summary
- The number of distinct integers $n$ for which $\log_{\left(\frac14\right)}(n^2 - 7n + 11)>0$ is:
- CAT - 2025
- Linear Inequalities
- In the set of consecutive odd numbers $\{1, 3, 5, \ldots, 57\}$, there is a number $k$ such that the sum of all the elements less than $k$ is equal to the sum of all the elements greater than $k$. Then, $k$ equals?
- CAT - 2025
- Number Systems
- The number of distinct pairs of integers $(x, y)$ satisfying the inequalities $x>y \ge 3$ and $x + y<14$ is:
- CAT - 2025
- Number Systems
For any natural number $k$, let $a_k = 3^k$. The smallest natural number $m$ for which \[ (a_1)^1 \times (a_2)^2 \times \dots \times (a_{20})^{20} \;<\; a_{21} \times a_{22} \times \dots \times a_{20+m} \] is:
- CAT - 2025
- Linear Inequalities