GDP Deflator and Inflation 4

Question 1

During a period of hyperinflation, which would you expect to see?

Accepted Answer

Nominal GDP far exceeding real GDP

Answer

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).

Question 2

A government reports that nominal GDP grew 6% last year, but the GDP deflator rose 6% as well. What happened to living standards?

Accepted Answer

They remained roughly unchanged

Answer

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.

Question 3

Which component of GDP would be captured in the GDP deflator but is completely absent from the CPI?

Accepted Answer

Prices of new residential construction

Answer

New residential construction is a form of investment (I in GDP) included in the deflator, but the CPI tracks consumer spending, not investment spending.

Question 4

In the expenditure approach to GDP, if all four components (C, I, G, NX) experience price increases, the GDP deflator will:

Accepted Answer

Rise, reflecting economy-wide price increases across all domestic output

Answer

The GDP deflator reflects price changes across all components of domestic output, so if all components see price increases, the overall deflator rises.

Question 5

If a country's GDP deflator rises while the country simultaneously experiences a recession, this is best described as:

Accepted Answer

Stagflation

Answer

Stagflation is the combination of rising prices (rising deflator) and economic stagnation or contraction (recession), a famously difficult policy challenge.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP Deflator and Inflation 4