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 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

nervesofsteel 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

Since level of demand is equivalent to quantity of gold available, increase in quantity of gold will lead to increse in demand which will cause inflation.
So answer is B

Phirozz wrote:

nervesofsteel 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

Since level of demand is equivalent to quantity of gold available, increase in quantity of gold will lead to increse in demand which will cause inflation.
So answer is B

Thanks Phirozz..!!

my doubt is that level of demand is equivalent not proportional to qty of gold..

then why are we assuming inc in qty of gold will increase the demand also..

I think i could understand the wording...

nervesofsteel wrote: Thanks Phirozz..!!

my doubt is that level of demand is equivalent not proportional to qty of gold..

then why are we assuming inc in qty of gold will increase the demand also..

I think i could understand the wording...

equivalent is nothing but ''of same level''. Dont u think if qty of gold is rising then demand will also rise ?
Let say demand is 50 and gold quantity is 50. If gold qty becomes 80 then demand will also become 80 since they r equivalent.
I dont know the unit of measuring demand

Thanks .. OA B

Is this a typical LSAT qn or GMAT qn?

Cheers

I don't understand why it's B based on the info given. If an increase in demand offsets inflation and an increase in demand is equivalent to an increase in the amount of gold, why would an increase in amount of gold cause inflation if everything is held equal? I would think that a reduction in the amount of gold would cause inflation or answer C.

Then again, I am assuming that the reductions in the supply of goods and services or increases in demand refer to the "compensating changes" rather than the "two possible changes" in the first sentence. Looking at it from this perspective, I see why the answer is B. I guess it is intuitive to think that decrease in goods and services and increase in demand refer to the "two possible changes." I would hate to get a question like this wrong on the GMAT because of that.