Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Real GDP is likely increasing, indicating economic growth.
B
Real GDP is decreasing, suggesting the economy is contracting.
C
Real GDP remains constant, showing no economic change.
D
Real GDP cannot be determined without additional information.
Understanding the Answer
Let's break down why this is correct
Answer
When the nominal GDP of a country is increasing, it means that the total value of goods and services produced is rising. However, if the GDP deflator is also rising, this indicates that prices for these goods and services are increasing too. To find out if real GDP, which adjusts for inflation, is growing, we need to consider the rate of inflation represented by the GDP deflator. If the increase in nominal GDP is smaller than the increase in the GDP deflator, real GDP could be falling, suggesting that the economy might not be as healthy as it seems. For example, if nominal GDP grows by 3% but the GDP deflator rises by 5%, real GDP is actually decreasing, which could mean people are buying less despite higher prices.
Detailed Explanation
When nominal GDP rises, it means the total money value of goods and services is increasing. Other options are incorrect because This option suggests that the economy is shrinking; This option claims there is no change in the economy.
Key Concepts
Real GDP
Nominal GDP
GDP Deflator
Topic
Calculating Real GDP and Deficits
Difficulty
medium level question
Cognitive Level
understand
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