Question 7

This sounds like a technical passage. But it makes the following points:

1. Subject to other compensating changes either an increase in demand or a decrease in supply will cause inflation.

2. In a prebanking economy the quantity of gold = the level of demand.

The question asks us what is true IN A PREBANKING ECONOMY.

Compare And Contrast The Answer Choices:

(A) Reject. It is contradicted by the passage which provides two explanations for inflation. Choice (A) uses the word "any."

(B) Strong Answer. If the quantity of gold = the level of demand then to increase the quantity of gold is to increase the level of demand which will lead to inflation. Tip - In critical thinking you should never select an answer choice unless you have read every word of every choice. But, make it your front runner.

(C) Reject. This is the opposite of what you want. A reduction of gold would indicate a decrease in the level of demand which would probably result in a decrease in the overall price level.

(D) This choice sounds so intellectual. But, reject it anyway. The passage makes it clear that a reduction in supply would cause inflation.

(E) Reject. There is no basis for this claim at all.

(B) is the best of the available choices.