Deflator and Inflation Flashcards
7 cards from real GDP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Deflator and Inflation flashcards as text
During a period of hyperinflation, which would you expect to see?
Answer: Nominal GDP far exceeding real GDP
Hyperinflation causes the price level — and thus the GDP deflator — to soar, so nominal GDP (inflated by prices) greatly exceeds real GDP (measured in base-year prices).
A government reports that nominal GDP grew 6% last year, but the GDP deflator rose 6% as well. What happened to living standards?
Answer: They remained roughly unchanged
When nominal GDP and the deflator grow at the same rate, real GDP is unchanged, meaning no actual improvement in output or living standards occurred.
Which component of GDP would be captured in the GDP deflator but is completely absent from the CPI?
Answer: Prices of new residential construction
New residential construction is a form of investment (I in GDP) included in the deflator, but the CPI tracks consumer spending, not investment spending.
In the expenditure approach to GDP, if all four components (C, I, G, NX) experience price increases, the GDP deflator will:
Answer: Rise, reflecting economy-wide price increases across all domestic output
The GDP deflator reflects price changes across all components of domestic output, so if all components see price increases, the overall deflator rises.
If a country's GDP deflator rises while the country simultaneously experiences a recession, this is best described as:
Answer: Stagflation
Stagflation is the combination of rising prices (rising deflator) and economic stagnation or contraction (recession), a famously difficult policy challenge.
When the BEA (Bureau of Economic Analysis) releases GDP data, which of the following is true about the GDP deflator?
Answer: It is calculated from the same data used to measure nominal and real GDP
The BEA derives the GDP deflator directly from the same national accounts data used to calculate both nominal and real GDP, so no separate survey is needed.
A rise in the price of domestically produced military equipment would affect:
Answer: The GDP deflator but not the CPI
Military equipment is part of government (G) spending in GDP, so its price is captured in the GDP deflator, but it does not appear in the consumer-focused CPI basket.