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There are fundamentally two possible changes in an economy that will : Critical Reasoning (CR)
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Re: There are fundamentally two possible changes in an economy that will [#permalink]
Guys, you have explained best... but still 1 doubt stands for me.....

Current demand is equal to available Gold.....

Now if gold quantity reduces, and "other things being equal" means same.... then relative demand should increase..... which states C CORRECTLY.

let's say... there are 100 mangoes.... and 100 people... all will have 1 mango...

if we reduce it's quantity by 20... and available is now 80 only.... then demand will increase... right??? as 100 are there for only 80...

Let me know where am I missing something?
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Re: There are fundamentally two possible changes in an economy that will [#permalink]
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Hkreation wrote:
Guys, you have explained best... but still 1 doubt stands for me.....

Current demand is equal to available Gold.....

Now if gold quantity reduces, and "other things being equal" means same.... then relative demand should increase..... which states C CORRECTLY.

let's say... there are 100 mangoes.... and 100 people... all will have 1 mango...

if we reduce it's quantity by 20... and available is now 80 only.... then demand will increase... right??? as 100 are there for only 80...

Let me know where am I missing something?

Dear Hkreation,
I'm happy to respond. :-) My friend, I think you are confusing currency and goods.

Suppose we have some group of people with $100, and there are 100 mangoes.
Supply has to do with the number of mangoes, with the goods available.
Demand has to do with the amount of money, with the purchasing power available.
If we increase or decrease the number of mangoes, we increase or decrease supply.
If we increase or decrease the amount of money, we increase or decrease demand.
Increasing the monetary supply increases the demand, which causes inflation.

In this situation, you are confusing gold with a consumer good. It's not. It's a form of currency. The fact that we are using the word "demand" to discuss necessarily implies that it is a currency, not a consumer good. If it were a consumer good, the word we would use is "supply." In addition to this, the passage makes very clear that "gold" underlies the currency system.

It is extremely important to be clear on the difference between "supply" and "demand." See:
https://magoosh.com/gmat/2012/gmat-supply-and-demand/

Does all this make sense?
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Re: There are fundamentally two possible changes in an economy that will [#permalink]
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B and C both address the idea that demand is equivalent to the quantity of available gold. If all else remains equal, an increase in available gold will increase demand and thereby cause inflation. B says exactly this: that an increase in gold will cause inflation. C says that a decrease in gold will cause inflation. As Mahendru said, this is the opposite of B, and it is directly contradicted by the passage.
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Re: There are fundamentally two possible changes in an economy that will [#permalink]
DmitryFarber wrote:
B and C both address the idea that demand is equivalent to the quantity of available gold. If all else remains equal, an increase in available gold will increase demand and thereby cause inflation. B says exactly this: that an increase in gold will cause inflation. C says that a decrease in gold will cause inflation. As Mahendru said, this is the opposite of B, and it is directly contradicted by the passage.


Please explain why option c is incorrect.

Option C supports premise "There changes are either reductions in the supply of goods and services or increases in demand"
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Re: There are fundamentally two possible changes in an economy that will [#permalink]
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Well, first off, we aren't trying to support the premises. That is never the task in CR. In this case, we've been asked to infer something, so we grant all the statements in the argument as true and try to see what else we know from there.

We know that demand varies directly with the quantity of available gold. Since increased demand leads to inflation, an increase in the availability of gold will cause inflation (by bringing about an increase in demand). That directly supports B.

C talks about what will happen if the availability of gold, and therefore demand, goes down. While we aren't actually told what happens when demand goes down, we have no reason to believe that inflation will occur. Inflation happens when demand goes up.
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Re: There are fundamentally two possible changes in an economy that will [#permalink]
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It has been stated in the premise that the quantity of money available is equivalent to the quantity of Gold available. Hence, an increase in gold quantity will lead to inflation not reduction. "C" mentions a reduction in Gold quantity will lead to inflation which is not true.
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Re: There are fundamentally two possible changes in an economy that will [#permalink]
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vinayaksatapute wrote:
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 pre-banking 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 pre-banking 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


CR00661.01


Official Explanation

Argument Construction

This question asks us which of the statements is most strongly supported by the information in the argument. Given no other relevant changes, two factors can cause inflation: a reduction in market supply of goods and services or an increase in market demand. The argument also indicates that the total quantity of money available—or, in a pre-banking economy, the quantity of gold available—determines market demand. Therefore, in a pre-banking economy, an increase in the quantity of gold available will increase demand. In a situation where supply remains constant, this increases demand for this fixed supply, thereby raising prices. In other words, increasing the quantity of gold in a pre-banking economy will cause inflation.

A. While this may be true in certain cases, it is not the argument made in the passage. The passage indicates that certain instances of inflation are caused by increased demand stimulated by an increase in available money (or gold).

B. Correct. According to the information in the passage, if the quantity of available gold in a pre-banking economy increases while supply of goods and services remains unchanged, demand for goods and services will increase relative to supply. This imbalance raises prices for the supply; that is, it causes inflation.

C. This answer suggests the opposite of the information in the passage. While the information in the passage indicates that an increase in the quantity of available gold may cause inflation, this choice suggests that a reduction in the available amount of gold will cause inflation.

D. This suggestion is contrary to the information in the passage: the passage suggests that in a pre-banking economy, the total available amount of gold determines the amount that a good or service will cost. This answer choice suggests that the total available amount of gold is irrelevant to the cost of given goods or services.

E. The passage nowhere indicates that economies will compensate for changes in demand by changing available supply. This suggestion may or may not be true in real-world terms, but there is no information in the passage to support it.

The correct answer is B.
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There are fundamentally two possible changes in an economy that will [#permalink]
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vinayaksatapute wrote:
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 pre-banking 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 pre-banking 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


CR00661.01


(A) any inflation is the result of reductions in the supply of goods and services
Not necessarily true. There are two factors given for the cause of inflation and "reductions in the supply of goods and services" is only one of them.

(B) if other factors in the economy are unchanged, increasing the quantity of gold available will lead to inflation
Now, this option seems good. The stimulus clearly mentions that only two factors can cause inflation, given other factors remain unchanged. This choice does just that.

(C) if there is a reduction in the quantity of gold available, then, other things being equal, inflation must result
This is actually the opposite of what the stimulus says.

(D) the quantity of goods and services purchasable by a given amount of gold is constant
Not necessarily true. The other factor, i.e., the change in the supply of goods and services can affect the quantity of goods and services purchasable by a given amount of gold.

(E) whatever changes in demand occur, there will be compensating changes in the supply of goods and services
Again, not necessarily true.

 
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Re: There are fundamentally two possible changes in an economy that will [#permalink]
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After going through the complete thread of discussion, I want to conclude the argument here in my way.

Inflation occurs if either supply side goes down or demand goes up along with no change in all other conditions.

Money available= demand = qty. of gold....Means gold is at demand side.
Therefore, we can infer that increasing gold will cause inflation if rest of the condition remain unchanged.

Hope it will help many!
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Re: There are fundamentally two possible changes in an economy that will [#permalink]
Hello GMATNinja, VeritasKarishma,

Could anyone of you please help me to understand below CR. When I read this CR, I couldn't understand what author is trying to convey, and I was not able to Pre-think or find Gap in it. What is Pre-Bank economy?

vinayaksatapute wrote:
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 pre-banking 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 pre-banking 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


CR00661.01


Thanks,
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vinayaksatapute wrote:
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 pre-banking 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 pre-banking 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


CR00661.01


AliciaSierra

2 causes of inflation: 'Decreased supply' and 'Increased demand'

In a pre-banking economy,
quantity of money available = the level of demand = the quantity of gold available

So in a pre-banking economy, demand = quantity of gold

It doesn't matter whether you understand what a pre-banking economy is or not. All the information needed for you to answer the question will be given to you in the question itself. If I say in the economy of Suderlands, demand = quantity of gold, will you wonder what economy of Suderlands is? No. You won't bother. It is the same case here. (As per context, I would assume pre-banking economy means an economy which does not have banks yet)

(A) any inflation is the result of reductions in the supply of goods and services

No. Inflation could be due to increased in demand too. We are not given that quantity of gold is fixed.

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

Correct. Increasing gold will increase demand which will lead to inflation (assuming everything else is fixed).

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

We don't know the impact of reduction in god i.e. reduction in demand.

(D) the quantity of goods and services purchasable by a given amount of gold is constant

Not given.

(E) whatever changes in demand occur, there will be compensating changes in the supply of goods and services

Not given.

Answer (B)
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Re: There are fundamentally two possible changes in an economy that will [#permalink]
I feel, the main reason people are choosing OPTION C is that they are confusing reduction in quantity of gold = Reduction in supply of goods and services.
In such a case both OPTION B and OPTION C can be inferred , which is not possible in GMAT.

But when we carefully look at the QUESTION STIMULUS 
Quote:
In a pre-banking economy the quantity of money available, and hence the level of demand, is equivalent to the quantity of gold available.
 

ie quantity of gold is equivalent to level of demand. Hence , if we change the QUANTITY OF GOLD then .....only DEMAND will change ( no impact on SUPPLY).
Consequently, we cannot infer OPTION C

Regards
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Re: There are fundamentally two possible changes in an economy that will [#permalink]
If the statements above are true, then it is also true that in a pre-banking economy - Would think of this question as MUST BE TRUE question.

(A) any inflation is the result of reductions in the supply of goods and services - this is too broad, additionally, this option does not explicitly state other factors would remain same. Without this, we can't say this HAS to be true

(B) if other factors in the economy are unchanged, increasing the quantity of gold available will lead to inflation - This option explicitly mentions "other factors remain unchanged", so it solves the problem with option A. Increasing gold quantity ~ increasing demad + everything else remain same = Inflation

(C) if there is a reduction in the quantity of gold available, then, other things being equal, inflation must result - This is total opposite. Reduction in gold means decline in demad (would assume that people buy goods and services with gold in pre banking economy). And decline in demad will not cause inflation. 

(D) the quantity of goods and services purchasable by a given amount of gold is constant - Nothing in the Stimulus say this HAS to be true. 

(E) whatever changes in demand occur, there will be compensating changes in the supply of goods and services­­ - Same as D, nothing in the passage says this is true. In fact, if this is true, inflation would never occur. ­
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