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# There are fundamentally two possible changes in an economy

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Intern
Joined: 01 Nov 2009
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There are fundamentally two possible changes in an economy  [#permalink]

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Updated on: 15 Oct 2017, 10:43
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65% (hard)

Question Stats:

62% (01:50) correct 38% (01:37) wrong based on 111 sessions

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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. There 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

Originally posted by vinayaksatapute on 26 Dec 2009, 01:48.
Last edited by abhimahna on 15 Oct 2017, 10:43, edited 2 times in total.
Edited the question and added OA
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Re: There are fundamentally two possible changes in an economy  [#permalink]

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26 Dec 2009, 04:39
Clearly B is the answer, since quantity of gold available means demand of goods and services.

Thus any increase in availability of gold quantity would lead to increase in demand and hence inflation
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Re: There are fundamentally two possible changes in an economy  [#permalink]

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28 Dec 2009, 02:53
vinayaksatapute wrote:
18. There are fundamentally two possible changes in an economy that will each cause inflation
unless other compensating changes also occur. There 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
(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

Please explain the above questions solution.

from question stem we can infer that,
1. reductions in the supply of goods and services will cause inflation.
2. increases in demand will cause inflation
3. In a prebanking economy, the level of demand, is equivalent to the quantity of gold available

so we can say that,
(i). quantity of gold is directly proportional to the inflation. i.e. as quantity of gold increases, the inflation occurs

A. any inflation is the result of both reductions in the supply of goods and services, and increases in demand. also this is for 'general' economy. but the questions stresses on prebanking economy.---no
B. this is the correct answer. a paraphrase of our point (i).
C. this is a reverse answer. an opposite statement of our point (i)---no
D. the relationship between the quantity of goods and services and amount of gold, in the prebanking economy, is not stated in the argument.---no
E. relation between the changes in demand and changes in supply of goods and services is not mentioned in the argument. what is mentioned is the effect of these both, individually, on the economy.---no

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

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29 Dec 2009, 08:52
Thats very satisfactory explanation.Thanks.
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Re: There are fundamentally two possible changes in an economy  [#permalink]

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30 Dec 2009, 06:30
B fr me.. on first instance.. all variables constant, one directly proptional is inc. so inflation inc.
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Re: There are fundamentally two possible changes in an economy  [#permalink]

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06 Feb 2010, 13:32
Statement 1: if there is no compensating changes, there are two main causes of inflation: less availability of goods or services

Statement 2: in the pre-banking era, there was a third cause of inflation --> the excess of gold in the economy

a) No, because it contradicts to the statement two
b) Looks good... next
c) Just the opposite
d) out of scope... there is no relation between amount of gold in the economy and the scarcity of goods and services
e) It kind of contradicts the statement 1. It is not stated that everything would counterbalance the economy.

So, IMO B
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Re: There are fundamentally two possible changes in an economy  [#permalink]

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09 Feb 2010, 08:53

C is not opposite, but unexplained. "increases in demand" is one factor for inflation. If less gold means less demand, then we cannot speculate which way will the inflation go.
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Re: There are fundamentally two possible changes in an economy  [#permalink]

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09 Jul 2010, 02:11
B from my side too .... took 2:04 .
@Vinayaksatapute, what is the OA?
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Re: There are fundamentally two possible changes in an economy  [#permalink]

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26 May 2014, 07:53
vinayaksatapute wrote:
18. There are fundamentally two possible changes in an economy that will each cause inflation
unless other compensating changes also occur. There 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
(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

Please explain the above questions solution.

I understood from the passage that the money was the level of demand while the quantity of gold was the level of supply

'In a prebanking economy the quantity of money
available, and hence the level of demand...'

Could anybody please clarify this point? I believe this is essential for deciding between B and C

Cheers!
J
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Re: There are fundamentally two possible changes in an economy  [#permalink]

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02 Jun 2014, 23:40
Looks very tricky and answer depends on how we accept changes given in stimulus. If there are changes leading to inflation then answer is B, but if they are compensating i.e. stopping infalation changes then it is C.
I answered C but seems that common there are part in two sentences give us the first scenario, so it is B
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Re: There are fundamentally two possible changes in an economy  [#permalink]

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28 Mar 2018, 12:47
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