GDP Deflator and Inflation 3

Question 1

When economists use the GDP deflator to convert nominal figures to real figures, the base year always has a deflator value of:

Accepted Answer

100

Answer

By convention, the base year GDP deflator is set to 100, making it the reference point for measuring price-level changes.

Question 2

Country A has nominal GDP of $500 billion and real GDP of $400 billion. What is the GDP deflator?

Accepted Answer

125

Answer

GDP Deflator = (Nominal GDP / Real GDP) × 100 = ($500B / $400B) × 100 = 125.

Question 3

A sharp increase in the GDP deflator while real GDP is flat implies:

Accepted Answer

Inflation with no real output growth

Answer

If the deflator rises sharply but real GDP doesn't change, prices are increasing without any gain in actual output — that is inflation without growth.

Question 4

Which scenario would cause the GDP deflator to rise even if the CPI stays flat?

Accepted Answer

A surge in domestic business investment at higher prices

Answer

Investment goods are in the GDP deflator but not in the CPI, so rising prices for domestically produced capital goods push the deflator up without affecting the CPI.

Question 5

Economists often prefer the GDP deflator over the CPI to measure economy-wide inflation because the GDP deflator:

Accepted Answer

Automatically reflects the current mix of all domestically produced goods

Answer

The GDP deflator covers all domestically produced goods and services and updates its basket each period, making it a broader, more flexible economy-wide price measure.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP Deflator and Inflation 3