There are fundamentally two possible changes in an economy

[BTGmoderatorDC]

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




OA B

Source: Official Guide

[deloitte247]

Premise: Reduction in supply of goods and services or increase in demand, are the two fundamentally possible changes in an economy that will cause inflation unless other compensating changes also occur.
Conclusion: In a pre-banking economy, the quantity of money available, and hence, the level of demand is equivalent to the quantity of gold available.

Option A - Incorrect:
No, this claim is not true. Other courses of inflation according to the passage are increase in demand for goods and services, and also, if other compensating changes also, it could result in inflation as well.

Option B - Incorrect:
Increasing the quantity of gold available which is the same as increasing the quantity of money in a pre-banking economy, means that there is enough for demand to be met. And as such, there will be no inflation because inflation will only occur if there is decrease in the quantity of gold available.

Option C - Correct:
The quantity of gold available is equivalent to the quantity of money available and the level of demand in the pre-banking economy. So, if there is a reduction in the quantity of gold available, the demand for it will be high, hence, it will lead to inflation

Option D - Incorrect:
We cannot know whether or not the quantity of goods and services purchasable by the amount of gold is constant in this passage because there is no supportive basis to back it up. So, therefore, this option is wrong.

Option E - Incorrect:
We cannot validate the fact that the occurrence of demand regarding inflation will bring about compensating changes in the supply of goods and services. The claim portrayed by this option tends to deviate from the passage stance on the causes of inflation.