Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
An increase in nominal GDP always indicates economic growth, regardless of inflation.
B
Real GDP provides a more accurate reflection of an economy's performance by excluding the effects of inflation.
C
A higher price index indicates that real GDP has decreased, showing a recession.
D
Nominal GDP and real GDP are identical when inflation is zero.
Understanding the Answer
Let's break down why this is correct
Answer
Inflation affects economic performance by changing the way we measure the economy's output. Nominal GDP measures the total value of goods and services produced at current prices, while real GDP adjusts for inflation, showing the true growth of the economy. For example, if nominal GDP increases due to rising prices but real GDP remains the same, it means that the economy isn't actually producing more goods; people are just paying more for the same things. This shows that relying solely on nominal GDP can give a misleading picture of economic health, making it seem like the economy is growing when it might not be. Understanding the difference helps us see how inflation can distort our perception of economic performance.
Detailed Explanation
Real GDP shows the true value of goods and services by removing the effects of rising prices. Other options are incorrect because Some people think that if nominal GDP goes up, the economy is always better; This option suggests that a higher price index means the economy is shrinking.
Key Concepts
Nominal GDP vs. Real GDP
Inflation and Economic Performance
GDP Deflator
Topic
GDP Calculations and Comparisons
Difficulty
easy level question
Cognitive Level
understand
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