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Calculating Real GDP and Deficits
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If nominal GDP increases while the GDP deflator remains the same, what happens to real GDP?

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Choose the Best Answer

A

Real GDP increases

B

Real GDP decreases

C

Real GDP remains unchanged

D

Real GDP becomes negative

Understanding the Answer

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Answer

When nominal GDP increases while the GDP deflator stays the same, it means that the overall output of goods and services in an economy is rising without any change in price levels. Real GDP is calculated by adjusting nominal GDP for inflation, using the GDP deflator to account for price changes. Since the GDP deflator is constant, an increase in nominal GDP directly translates to an increase in real GDP. For example, if nominal GDP rises from $1 trillion to $1. 1 trillion and the GDP deflator remains at 1.

Detailed Explanation

When nominal GDP goes up and the GDP deflator stays the same, real GDP also increases. Other options are incorrect because Some might think that if prices stay the same, real GDP must go down; It's a common mistake to think that unchanged prices mean unchanged real GDP.

Key Concepts

Real GDP calculation
Nominal GDP and GDP deflator
Economic indicators
Topic

Calculating Real GDP and Deficits

Difficulty

easy level question

Cognitive Level

understand

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