GMAT Question of the Day - Daily to your Mailbox; hard ones only

It is currently 16 Oct 2018, 10:26

Close

GMAT Club Daily Prep

Thank you for using the timer - this advanced tool can estimate your performance and suggest more practice questions. We have subscribed you to Daily Prep Questions via email.

Customized
for You

we will pick new questions that match your level based on your Timer History

Track
Your Progress

every week, we’ll send you an estimated GMAT score based on your performance

Practice
Pays

we will pick new questions that match your level based on your Timer History

Not interested in getting valuable practice questions and articles delivered to your email? No problem, unsubscribe here.

Close

Request Expert Reply

Confirm Cancel

There are fundamentally two possible changes in an economy that will

  new topic post reply Question banks Downloads My Bookmarks Reviews Important topics  
Author Message
TAGS:

Hide Tags

Intern
Intern
avatar
Joined: 01 Nov 2009
Posts: 9
There are fundamentally two possible changes in an economy that will  [#permalink]

Show Tags

New post Updated on: 27 Sep 2018, 03:57
1
5
00:00
A
B
C
D
E

Difficulty:

  85% (hard)

Question Stats:

54% (02:00) correct 46% (01:55) wrong based on 152 sessions

HideShow timer Statistics

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 Bunuel on 27 Sep 2018, 03:57, edited 3 times in total.
Renamed the topic and edited the question.
Most Helpful Expert Reply
Magoosh GMAT Instructor
User avatar
G
Joined: 28 Dec 2011
Posts: 4494
Re: Inflation CR  [#permalink]

Show Tags

New post 02 Jan 2014, 18:40
5
slatewalamurtuza 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 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

What is the correct answer for this one. I am not able to understand.

Is it B or C

Dear slatewalamurtuza
I'm happy to respond. :-) I must say that I am somewhat skeptical about this question because of the poor quality of writing in the stem. All CR questions on the GMAT adhere entirely to the very high standard of grammar & rhetoric held on the GMAT SC. This question falls short, often indicating a low question quality. Nevertheless, there is only one clearly right answer.

You may find this blog provides some helpful background for this question:
http://magoosh.com/gmat/2012/inflation- ... -the-gmat/

First of all, it's very important to note from the passage
Fact #1: inflation is caused by
(1) reduction in supply of goods & services, or
(2) increase in demand

Fact #2: in prebanking economy, amount of gold = amount of demand
Those two are very big. Now, the answers:
(A) any inflation is the result of reductions in the supply of goods and services
this would be true if the demand (i.e. the supply of gold) remained constant --- but we can't assume that, so we can infer this answer. This is incorrect.

(B) if other factors in the economy are unchanged, increasing the quantity of gold available will lead to inflation
Gold = demand. If we increase gold, we increase demand, which is one cause of inflation. This is a very promising answer.

(C) if there is a reduction in the quantity of gold available, then, other things being equal, inflation must result
Reduce gold ==> reduce demand. That does not lead to inflation --- it leads in the opposite direction (toward recession). This is incorrect.

(D) the quantity of goods and services purchasable by a given amount of gold is constant
This would not be true if inflation happened. Inflation means the same money buys fewer goods. This is incorrect.

(E) whatever changes in demand occur, there will be compensating changes in the supply of goods and services
No! If that happened, there never would be inflation or recession! The economy would be magically balanced at every moment. That is pure fairyland fantasy. Supply and demand are independent and uncorrelated: hence, the realities of inflation and recession. This answer is incorrect.

The only tenable answer is (B).

It's true that it's helpful to understand the basics of how inflation operates to interpret this question. But, if you plan to go to business school and get an MBA, you had better understand in detail how inflation works!

Does all this make sense?
Mike :-)
_________________

Mike McGarry
Magoosh Test Prep


Education is not the filling of a pail, but the lighting of a fire. — William Butler Yeats (1865 – 1939)

General Discussion
Intern
Intern
User avatar
Joined: 22 Dec 2009
Posts: 19
Re: There are fundamentally two possible changes in an economy that will  [#permalink]

Show Tags

New post 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
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

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

coming to answer stem:
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

Answer:B
_________________

Deserve before you Desire

Intern
Intern
avatar
Joined: 12 Apr 2015
Posts: 6
Re: There are fundamentally two possible changes in an economy  [#permalink]

Show Tags

New post 15 Apr 2015, 03:54
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?
Magoosh GMAT Instructor
User avatar
G
Joined: 28 Dec 2011
Posts: 4494
Re: There are fundamentally two possible changes in an economy  [#permalink]

Show Tags

New post 15 Apr 2015, 11:07
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:
http://magoosh.com/gmat/2012/gmat-supply-and-demand/

Does all this make sense?
Mike :-)
_________________

Mike McGarry
Magoosh Test Prep


Education is not the filling of a pail, but the lighting of a fire. — William Butler Yeats (1865 – 1939)

Manhattan Prep Instructor
User avatar
S
Joined: 22 Mar 2011
Posts: 1319
Re: There are fundamentally two possible changes in an economy  [#permalink]

Show Tags

New post 29 Nov 2015, 01:11
2
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.
_________________


Dmitry Farber | Manhattan GMAT Instructor | New York


Manhattan GMAT Discount | Manhattan GMAT Course Reviews | View Instructor Profile |
Manhattan GMAT Reviews

Senior Manager
Senior Manager
User avatar
Status: Always try to face your worst fear because nothing GOOD comes easy. You must be UNCOMFORTABLE to get to your COMFORT ZONE
Joined: 15 Aug 2014
Posts: 294
Concentration: Marketing, Technology
GMAT 1: 570 Q44 V25
GMAT 2: 600 Q48 V25
WE: Information Technology (Consulting)
GMAT ToolKit User Reviews Badge
Re: There are fundamentally two possible changes in an economy  [#permalink]

Show Tags

New post 28 Dec 2015, 23:47
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"
_________________

"When you want to succeed as bad as you want to breathe, then you’ll be successful.” - Eric Thomas

I need to work on timing badly!!

Manhattan Prep Instructor
User avatar
S
Joined: 22 Mar 2011
Posts: 1319
Re: There are fundamentally two possible changes in an economy  [#permalink]

Show Tags

New post 29 Dec 2015, 03:30
1
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.
_________________


Dmitry Farber | Manhattan GMAT Instructor | New York


Manhattan GMAT Discount | Manhattan GMAT Course Reviews | View Instructor Profile |
Manhattan GMAT Reviews

Jamboree GMAT Instructor
User avatar
Status: GMAT Expert
Affiliations: Jamboree Education Pvt Ltd
Joined: 15 Jul 2015
Posts: 273
Location: India
Re: There are fundamentally two possible changes in an economy  [#permalink]

Show Tags

New post 02 Jan 2016, 00:04
2
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.
_________________

Aryama Dutta Saikia
Jamboree Education Pvt. Ltd.

Non-Human User
User avatar
Joined: 01 Oct 2013
Posts: 3184
Premium Member
Re: There are fundamentally two possible changes in an economy that will  [#permalink]

Show Tags

New post 27 Sep 2018, 04:02
Hello from the GMAT Club VerbalBot!

Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).

Want to see all other topics I dig out? Follow me (click follow button on profile). You will receive a summary of all topics I bump in your profile area as well as via email.
_________________

-
April 2018: New Forum dedicated to Verbal Strategies, Guides, and Resources

GMAT Club Bot
Re: There are fundamentally two possible changes in an economy that will &nbs [#permalink] 27 Sep 2018, 04:02
Display posts from previous: Sort by

There are fundamentally two possible changes in an economy that will

  new topic post reply Question banks Downloads My Bookmarks Reviews Important topics  


Copyright

GMAT Club MBA Forum Home| About| Terms and Conditions and Privacy Policy| GMAT Club Rules| Contact| Sitemap

Powered by phpBB © phpBB Group | Emoji artwork provided by EmojiOne

Kindly note that the GMAT® test is a registered trademark of the Graduate Management Admission Council®, and this site has neither been reviewed nor endorsed by GMAC®.