GDP Real vs. Nominal GDP 2 — Questions and Answers
Question 1: If nominal GDP rises from $20 trillion to $22 trillion but the price level rises by 10%, what happened to real GDP?
- It stayed the same (Correct answer)
- It rose by 10%
- It fell slightly
- It doubled
Correct answer: It stayed the same
A 10% nominal increase offset entirely by 10% inflation leaves real GDP unchanged.
Question 2: The GDP deflator for 2024 is 115 (base year 2020=100). If nominal GDP is $23 trillion, what is real GDP?
- $20 trillion (Correct answer)
- $21.5 trillion
- $26.45 trillion
- $23 trillion
Correct answer: $20 trillion
Real GDP = (Nominal GDP / GDP deflator) × 100 = ($23T / 115) × 100 = $20 trillion.
Question 3: Which scenario represents an increase in real GDP with no change in nominal GDP?
- Prices fall while output stays the same (Correct answer)
- Prices rise while output stays the same
- Both prices and output rise equally
- Nominal GDP cannot stay constant if output changes
Correct answer: Prices fall while output stays the same
If prices fall and output is unchanged, nominal GDP stays the same but real GDP rises because the deflator decreased.
Question 4: A country's real GDP fell despite a rising nominal GDP. This most likely means:
- Inflation exceeded the growth rate of nominal GDP (Correct answer)
- The base year was recently updated
- Exports increased substantially
- Tax revenues declined
Correct answer: Inflation exceeded the growth rate of nominal GDP
Real GDP falls when the price level rises faster than nominal GDP, eroding real purchasing power.
Question 5: Which of the following is NOT used to adjust nominal GDP to real GDP?
- Unemployment rate (Correct answer)
- GDP deflator
- Price index
- Consumer Price Index (as an approximation)
Correct answer: Unemployment rate
The unemployment rate measures labor market conditions and is not a price measure used to deflate GDP.
Question 6: If real GDP grows at 3% and the GDP deflator rises at 4%, then nominal GDP growth is approximately:
- 7% (Correct answer)
- 1%
- 3%
- 4%
Correct answer: 7%
Nominal GDP growth ≈ real GDP growth + inflation rate = 3% + 4% = 7%.
Question 7: Why do economists prefer real GDP over nominal GDP when comparing economic output across different years?
- Real GDP removes the effect of price changes, isolating actual output changes (Correct answer)
- Real GDP accounts for population growth automatically
- Nominal GDP is only calculated quarterly
- Real GDP includes underground economy estimates
Correct answer: Real GDP removes the effect of price changes, isolating actual output changes
Real GDP holds prices constant at a base year level, so changes reflect true changes in the quantity of goods and services produced.
GDP Real vs. Nominal GDP 2
If nominal GDP rises from $20 trillion to $22 trillion but the price level rises by 10%, what happened to real GDP?