economy

Expert replies

ketkoag: Legendary Member; Posts: 876; Joined: Thu Apr 10, 2008 8:14 am; Thanked: 13 times

by ketkoag » Mon May 11, 2009 2:20 am

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

Like this post

Source: Beat The GMAT — Critical Reasoning | Mon May 11, 2009 2:20 am

Pranay: Senior | Next Rank: 100 Posts; Posts: 59; Joined: Tue May 05, 2009 1:58 am; Thanked: 1 times

Re: economy

by Pranay » Mon May 11, 2009 2:25 am

I would prefer C.

Please post the answer.

Like this post

KICKGMATASS123: Master | Next Rank: 500 Posts; Posts: 113; Joined: Thu Feb 26, 2009 8:13 am; Location: New Jersey; GMAT Score:650

Re: economy

by KICKGMATASS123 » Tue May 12, 2009 7:28 pm

IMO B

The question states
1. There are 2 changes that cause inflation
i) Increase in Supply
ii) Increase in Demand

Unless other compensating changes occur...

Prebanking = standard of gold instead of level of demand

In B it says that other factors are constant and and level of demand increases therefore, in prebanking it is inferred level of gold increases = inflation will result!

Can we have the OA pls..

I found this to be tough..

Like this post

rahulg83: Legendary Member; Posts: 575; Joined: Tue Nov 04, 2008 2:58 amFollowed by: 4 members; Location: India; Thanked: 18 times; GMAT Score:710

Re: economy

by rahulg83 » Tue May 12, 2009 9:01 pm

ketkoag 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

I'd prefer B here, because Demand is equivalent to quantity of gold available. Now if Anything else is unchanged (Supply, compensating factors etc.) and demand increases, then inflation will occur. C is not preferable here because it uses extreme language. Anyways, reduction of gold decreases the demand, so this factor will oppose inflation rather than support it.

OA plz?

Like this post

anshulseth: Master | Next Rank: 500 Posts; Posts: 145; Joined: Mon Feb 16, 2009 8:41 amFollowed by: 2 members; Thanked: 2 times

by anshulseth » Wed May 13, 2009 3:01 am

OA is B

But I have a doubt.

What do u consider gold in prebanking, supply or demand.

If supply, then C is correct, as reduction in supply cause inflation.
If demand, then B is correct.

Thus the confusion.

Can anyone explain it more logically.

Asset

Like this post

hk: MBA Student; Posts: 532; Joined: Wed Jan 28, 2009 1:39 pmFollowed by: 9 members; Location: Barcelona; Thanked: 33 times; GMAT Score:640

by hk » Wed May 13, 2009 8:04 am

anshulseth wrote:OA is B

But I have a doubt.

What do u consider gold in prebanking, supply or demand.

If supply, then C is correct, as reduction in supply cause inflation.
If demand, then B is correct.

Thus the confusion.

Can anyone explain it more logically.

I would go with B and here is my reasoning.

The argument says:

1. Inflation = Decrease in Supply OR Increase in Demand
2. Demand = Amount of gold.

Answer choice B says that if the amount of gold is increased there will be inflation which is correct as follows:

Increase in Gold = Increase in demand =>Inflation (According to 1 and 2)

But C is not true as Decrease in gold = decrease in demand and this would not lead to inflation according to 1.

Wanna know what I'm upto? Follow me on twitter: https://twitter.com/harikrish

Like this post

anshulseth: Master | Next Rank: 500 Posts; Posts: 145; Joined: Mon Feb 16, 2009 8:41 amFollowed by: 2 members; Thanked: 2 times

by anshulseth » Wed May 13, 2009 9:26 am

@hk
You have not answered my question whether gold is to be taken as supply or demand.Could you shed some light on it.

Asset

Like this post

rs2010: Master | Next Rank: 500 Posts; Posts: 232; Joined: Fri Jul 04, 2008 4:14 pmFollowed by: 1 member; Thanked: 14 times; GMAT Score:760

by rs2010 » Wed May 13, 2009 10:44 am

Yes is there any rationality for selecting demand as gold. It could be supply where author wants to show the balance between demand and supply by using work equivalent.

Like this post

thetrystero: Master | Next Rank: 500 Posts; Posts: 154; Joined: Mon Apr 13, 2009 10:57 pm; Thanked: 3 times

Re: economy

by thetrystero » Wed May 13, 2009 11:00 pm

ketkoag 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

two factors causing inflation:
1. decrease in supply of goods
2. increase in demand/gold

A. could be due to increase in demand/gold as well (2).
B. sounds good.
C. opposite to (2).
D. contradicts the definition of inflation
E. although true, cannot be implied based on the given information.

My answer: B

Like this post

thetrystero: Master | Next Rank: 500 Posts; Posts: 154; Joined: Mon Apr 13, 2009 10:57 pm; Thanked: 3 times

Re: economy

by thetrystero » Wed May 13, 2009 11:04 pm

ketkoag wrote:... level of demand, is equivalent to the quantity of gold available.

@hemantsood, @anshulseth: i believe the question states quite clearly that demand=gold.

Like this post

anshulseth: Master | Next Rank: 500 Posts; Posts: 145; Joined: Mon Feb 16, 2009 8:41 amFollowed by: 2 members; Thanked: 2 times

by anshulseth » Wed May 13, 2009 11:11 pm

'equivalent' means equal in value, not the same as.
Thus the confusion.

Asset

Like this post

Minheequang: Junior | Next Rank: 30 Posts; Posts: 19; Joined: Tue May 12, 2009 11:55 pm

Re: economy

by Minheequang » Fri May 15, 2009 11:57 pm

I choose B
Fact:
Inflation is caused by 1)increase in demand or 2)decrease in supply (others unchanging)

In prebanking economy: quantity of money = level of demand = quantity of gold

Therefore, quantity of gold increase (=level of demand increase), other unchanging --> inflation occurs

Like this post

Brad.C: Master | Next Rank: 500 Posts; Posts: 100; Joined: Tue Aug 05, 2014 11:14 am

by Brad.C » Sun May 15, 2016 1:16 pm

It seems to me that the right answer should be C

Like this post

Post new topic Post Reply

• Page 1 of 1

GMAT Course Reviews

559 reviews

1168 reviews

431 reviews

359 reviews

147 reviews

5/5

5 Star (560 Reviews)

"Target Test Prep is the closest to the official version of the GMAT exam, about 99% accuracy in terms of the quality and quantity of information. The course has excellently created singular sets of focused lessons and tests for every possible topic that one could come across in the official GMAT exam."

"The TTP course maximizes the efficiency of the time you spend studying. It will take time and effort but I could almost guarantee that if you complete the course exactly as it is laid out you will get an amazing score. They also have a very responsive team willing to help with any questions you might have."

"TTP has two things that I think no other test prep company offers: A teaching approach that reinforces understanding and an attitude that will give you the mental preparedness needed to succeed on the test. TTP gives you a deep understanding of the concept you need to know while teaching you how to think."

Write a Review