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# There are fundamentally two possible changes in an economy

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

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13 Jul 2004, 09:03
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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 prebnking 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 resultâ€¦
(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

thank you
Director
Joined: 01 Feb 2003
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13 Jul 2004, 10:09
Well my Answer was C (1min 5s)

"the level of demand" is equivalant to the amount of gold. Therefore, if quantity of gold increases, the level of demand increases - this results in inflation. This should be the logic for B - I am not convinced by this answer though!
Manager
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13 Jul 2004, 10:30
I remember missing this question ..

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 prebnking economy the quantity of money available, and hence the level of demand, is equivalent to the quantity of gold available.

Reductions in the supply of goods, services -- > inflation
Increase in demand -- >inflation

(B)if other factors in the economy are unchanged, increasing the quantity
of gold available will lead to inflation

Increasing gold (increasing goods)--> inflation (This is not an inference)
We know that reducing goods would cause inflation but we don't know what would happen if goods were to increase ...

(C)if there is a reduction in the quantity of gold available, then, other
things being equal, inflation must resultâ€¦

Decreasing gold ---> inflation (This is the clear inference as we know that reducing goods would lead to inflation)

So C should be the answer

what I am not seeing if the correct answer is B??

Director
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13 Jul 2004, 10:36
inflation occurs if -
2 mins

1.reductions in the supply of goods and services
2.increases in demand

the level of demand=the quantity of gold available

hence if other factors (supply of goods and services) are constant
increases in demand -> inflation
or increases in the quantity of gold available -> inflation

Hence B

(C is wrong as it talks about reduction in gold->reduction in demand, consequences of which is not stated in the argument)
Director
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13 Jul 2004, 11:06
disagree with B

quantity of gold = demand for gold (my interpretation)

decrease in quantity of gold = INCREASE in demand for gold

Also as decrease in goods/services leads to inflation, considering gold as under "goods", inflation should increase.

If the above argument does not hold good, then I feel that the question is weird!
Director
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13 Jul 2004, 11:15
B for me.

Prebanking economy:
level of demand ~= available gold (directly propotional)
quantity of gold increased ---> level of demand increases [POINT A]

fundamentally:
cause of inflation = increase in demand [POINT B]

gold--->demand--->inflation

Manager
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13 Jul 2004, 11:47
Well, now I think I can see know the reason..

In a prebnking economy the quantity of money available, and hence the level of demand, is equivalent to the quantity of gold available.

demand = gold

(B)if other factors in the economy are unchanged, increasing the quantity
of gold available will lead to inflation

This says that increasing gold (=demand) will lead to inflation. BINGO! That is also said in the paragraph.

(C)if there is a reduction in the quantity of gold available, then, other
things being equal, inflation must resultâ€¦

reduction in the gold (=demand) will lead inflation..This is not being said..

Well, I couldn't clearly associate gold and demand at first..

is so useful!!
Director
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13 Jul 2004, 11:57
afife76 wrote:
Well, now I think I can see know the reason..

is so useful!!

it always is, that's why we all are sticking to this forum.
Hale GmatClub
Manager
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14 Jul 2004, 00:38
B is the answer only if we assume that GOLD DOES NOT QUALIFY UNDER "GOODS AND SERVICES" (rather dubious assumption)

Otherwise, the increase in the quantity of gold is the increase in the quantity of goods and services available. The ensueing increase in demand will only restore the equilibrium, so no inflation should be expected
Senior Manager
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14 Jul 2004, 01:52
I dobt that this question follows the principles of GMAT, no too specific. If you're economics major, you easily see that gold in prebanking economy is the liquidity so the increase in gold leads to inflation.
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"Life is like a box of chocolates, you never know what you'r gonna get"

SVP
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14 Jul 2004, 02:24
I use standard logic:

If A or if B, then D
B=E
Therefore, if A or if E, then D.

Option B matches.
Director
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14 Jul 2004, 07:53
stolyar
I read the slides of akmaibrah which describes these standard logic but I am unable to correlate any of these with any of the problem. Can you please tell how to implement if-else logic in standard problem. If possible with some example..
14 Jul 2004, 07:53
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