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# There are fundamentally two possible changes in an economy

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Director
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There are fundamentally two possible changes in an economy [#permalink]

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29 Apr 2005, 17:36
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18. There are fundamentally two possible changes in an economy that will each cause inflation unless other compensating changes also occur. These changes are either reductions in the supply of goods and services or increases in demand. In a prebanking economy the quantity of money available, and hence the level of demand, is equivalent to the quantity of gold available.

If the statements above are true, then it is also true that in a prebanking economy

(A) any inflation is the result of reductions in the supply of goods and services
(B) if other factors in the economy are unchanged, increasing the quantity of gold available will lead to inflation
(C) if there is a reduction in the quantity of gold available, then, other things being equal, inflation must result
(D) the quantity of goods and services purchasable by a given amount of gold is constant
(E) whatever changes in demand occur, there will be compensating changes in the supply of goods and services
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29 Apr 2005, 21:40
C

demand ~~ gold
less gold > less demand > inflation
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30 Apr 2005, 00:34
It should be B.
demand = gold
increase in demand -> inflation
=> increase in quantity of gold -> inflation
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30 Apr 2005, 03:42
C. Increasing the quantity of gold will cause deflation as demand slows. Decreasing the amount of gold in stock will put pressure on demand and send prices up, hence inflation. Definately C.
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02 May 2005, 14:52
The OA is B.
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