Thursday, July 15, 2004

SC on Gold and Demand

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 prebnking 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
(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

Here I was stuck between B and C. I could get it properly that gold represents demand and that if gold increases, then demand increases and vice versa.

What I should have kpt in mind that the increase of gold (demand) has been mentioned, but its reduction has not been mentioned. So C should have been rejected.


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