Question

Given below is a pair of events I and II. You have to decide their nature of relationship. Assume that the given information is correct and final.

I. Financial Institutions are largely unregulated
II. Today, world is passing through a serious phase of economic crisis

• A. I is the main cause and II is the main effect
• B. I is effect but II is not the main cause
• C. II is the main cause and I is the main effect
• D. II is an effect but I is not the main cause

Hint:

One statement is a standing condition and the other is something happening now. Also remember that a crash normally leads to more rules, not fewer.

Answer 1

The Correct Option is A

Sort this pair using the condition versus event test. One statement, "Financial Institutions are largely unregulated", describes a continuing state of affairs with no start date. The other, "the world is passing through a serious phase of economic crisis", names something happening now. Standing conditions set the stage for events; events do not create the stage they are played on.

1. I is the main cause and II is the main effect: Weak oversight lets lenders take risks that no prudent rulebook would allow: lending to borrowers who cannot repay, holding thin capital buffers, and building complicated products nobody can price. When the bets sour, losses jump from one institution to the next through the web of credit between them, lending freezes, firms cannot fund their operations, and output and jobs fall. That is a crisis, and its root here is the missing rulebook.
2. I is effect but II is not the main cause: This calls the absence of regulation an effect. Regulation, or the lack of it, is written by parliaments and supervisory bodies through deliberate choices and legislative gaps. It sits upstream of the market, not downstream of it.
3. II is the main cause and I is the main effect: This says the crisis stripped away regulation. History runs the other way. After a crash, governments and central banks add rules, raise capital requirements and widen supervision. A crisis tightens the screws, it does not loosen them.
4. II is an effect but I is not the main cause: The first half is sound, since a crisis is plainly an outcome. But refusing to accept lax regulation as its main cause leaves the pair with a floating effect and no cause at all, which defeats the purpose of the question.

So the correct answer is (A). Unregulated financial institutions are the cause and the economic crisis is the effect.

Let's summarize:

• A standing condition causes an event, never the reverse.
• Weak financial oversight allows excess risk taking, which is the classic route to a crisis.
• Crises are followed by more regulation, so the crisis cannot be what removed it.

Option (A) is the answer.