There are fundamentally two possible changes in an economy that will each cause inflation unless other compensating changes also occur....
GMAT Critical Reasoning : (CR) Questions
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
Passage Visualization
| Passage Statement | Visualization and Linkage |
|---|---|
| "There are fundamentally two possible changes in an economy that will each cause inflation unless other compensating changes also occur." | Establishes: Two specific triggers for inflation Key Pattern: Each change alone → inflation (unless compensated) Example:
|
| "These changes are either reductions in the supply of goods and services or increases in demand." | Identifies the Two Triggers:
Concrete Example:
Both lead to same outcome: Inflation |
| "In a pre-banking economy the quantity of money available, and hence the level of demand, is equivalent to the quantity of gold available." | Establishes Direct Equivalence: Money = Gold = Demand Level Critical Link: No banking system to multiply money supply Numerical Example:
Perfect 1:1:1 relationship |
| Overall Implication | Core Pattern Revealed: In pre-banking economies, gold quantity directly controls one of the two inflation triggers Logical Chain: Gold ↔ Money ↔ Demand ↔ Inflation Trigger Example Scenario:
This creates a direct causal pathway from gold changes to inflation risk. |
Valid Inferences
Inference: In a pre-banking economy, increases in the quantity of gold available will cause inflation unless other compensating changes occur.
Supporting Logic: Since reductions in demand cause inflation unless compensated, and since the level of demand is equivalent to the quantity of gold available in a pre-banking economy, therefore reductions in gold quantity directly reduce demand and trigger inflation. The passage establishes that demand decreases are one of the two fundamental changes that cause inflation, and in pre-banking economies, gold quantity determines demand level through the direct equivalence relationship.
Clarification Note: This inference focuses on gold reductions specifically, as the passage establishes the equivalence relationship between gold and demand, allowing us to directly apply the inflation-causing mechanism to changes in gold quantity.