Critical Reasoning

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 that 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 finlation
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

why is the answer B??

jc114 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 that 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 finlation
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

why is the answer B??

A - we are given that there are 2 causes. So, we cannot converge on
reduction in supply of goods as the reason. Also, nothing is said about
supply of goods in a pre-banking economy.

B - Increase in gold will lead to increase in money causing an increase
in demand. We know increase in demand leads to inflation. So, this is
correct.

C - reduction in qty of gold => less money => less demand. So, no
inflation.

D - Out of scope

E - Out of scope. Unstated premise in argument.

IMO: B.

Thanks.

Two causes for inflation: supply reduction OR increase in demand

Pre-bank: demand = quantity of gold

The question asks us to apply our knowledge of inflation to this new situation.

If the demand = supply, then there prob. will not be inflation. But if the demand increases, there will be inflation. B is correct because when the quantity of gold increases, the demand increases. And an increase in demand = inflation.

While a passage like this drives an economist insane, the answer B is correct in regards to economic principles and the assertions in the passage itself.