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# There are fundamentally two possible changes in an economy

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

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20 Aug 2006, 08:24
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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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Senior Manager
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20 Aug 2006, 11:08
is it (B)

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Director
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20 Aug 2006, 11:41
C is a trap ... B is correct

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Senior Manager
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20 Aug 2006, 12:48
Agree .. B seems like the best choice

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Senior Manager
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20 Aug 2006, 13:49
Y not C? I like C

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Director
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20 Aug 2006, 15:14
Go with C too...

Why would you say that C is a trap?
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Uh uh. I know what you're thinking. "Is the answer A, B, C, D or E?" Well to tell you the truth in all this excitement I kinda lost track myself. But you've gotta ask yourself one question: "Do I feel lucky?" Well, do ya, punk?

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20 Aug 2006, 16:24
B it is.

C is doing totally opposite.

Now:
Reductions in the supply of goods and services -------> Inflation
Increases in demand-------> Inflation
Prebanking:
Reductions in the supply of goods and services -------> Inflation
Increases in demand (i.e money available or gold available)-------> Inflation

C says: Reduction in the quantity of gold available------>Inflation - This is opposite of the bold line above.

B is nothing but the bold line above.
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Director
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20 Aug 2006, 16:32
B it is, completely agree that C is a trap.

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Director
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20 Aug 2006, 17:42
B

C is opposite - we need increase in demand (supply of money -> increase in gold) - to cause inflation. This matches (B)

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21 Aug 2006, 03:27
Yep, if you increased the amount of gold in a prebanking economy, then you essentially increads the amount of money. More money increases prices, which in turn leads to inflation.

(B) stands.

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21 Aug 2006, 03:27
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