Multiple choice

Directions: A brief passage or a statement is given and a question is asked, based on the information provided in the passage/statement. Critically examine the five alternative answer options marked (1) to (5) and choose the best answer. 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

  1. any inflation is the result of reductions in the supply of goods and services

  2. if other factors in the economy are unchanged, increasing the quantity of gold available will lead to inflation

  3. if there is a reduction in the quantity of gold available, then, other things being equal, inflation must result

  4. the quantity of goods and services purchasable by a given amount of gold is constant

  5. Other things remaining the same a reduction in the quantity of gold available, accompanied by a corresponding reduction in the level of demand will have no impact on the economy.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

(2) Options (1) and (4) can be easily rejected. Option (3) will have the opposite effect. Option (5) is rendered unsuitable because of the use of the word ‘economy’ instead of ‘inflation’.

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