GDP Real vs. Nominal GDP 4

Question 1

During a period of deflation, which of the following is true about the relationship between nominal and real GDP?

Accepted Answer

Real GDP grows faster than nominal GDP

Answer

Deflation means prices are falling, so adjusting nominal GDP upward (dividing by a deflator less than 1) yields a higher real GDP.

Question 2

An economy's GDP deflator is 80 in year 1 and 100 in year 5 (base year). This means:

Accepted Answer

Prices were lower in year 1 than in year 5

Answer

A deflator below 100 indicates price levels were lower than the base year, so year 1 had lower prices than year 5.

Question 3

Country X has nominal GDP of $500 billion and a GDP deflator of 125. Country Y has nominal GDP of $400 billion and a GDP deflator of 80. Which country has higher real GDP?

Accepted Answer

Country X

Answer

Country X real GDP = $500B/125×100 = $400B; Country Y real GDP = $400B/80×100 = $500B — Country Y has higher real GDP.

Question 4

Which of the following would cause nominal GDP to rise while real GDP remains flat?

Accepted Answer

Inflation with no change in output

Answer

Pure inflation raises the price of existing output, inflating nominal GDP without any actual increase in the volume of production.

Question 5

A student argues that a country became richer because its nominal GDP grew 8% last year. What critical information is missing?

Accepted Answer

The inflation rate during that year

Answer

Without knowing the inflation rate, it is impossible to determine how much of the 8% nominal growth represents actual increases in output.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP Real vs. Nominal GDP 4