Refer to the above diagram.Which of the following statements is correct?
A)The price index is greater than 100 for every year shown on the graph.
B)Nominal GDP must be deflated in each year prior to 1992 to determine real GDP.
C)Real GDP has grown in this economy, but nominal GDP has not.
D)Nominal GDP must be deflated in each year since 1992 to determine real GDP.

Question

Refer to the above diagram.Which of the following statements is correct?
A)The price index is greater than 100 for every year shown on the graph. 
B)Nominal GDP must be deflated in each year prior to 1992 to determine real GDP. 
C)Real GDP has grown in this economy, but nominal GDP has not. 
D)Nominal GDP must be deflated in each year since 1992 to determine real GDP.

Quizplus · Accepted Answer

The graph shows both nominal GDP and price index, meaning that nominal GDP has not been adjusted for inflation. Therefore, in order to calculate real GDP (which accounts for inflation), nominal GDP must be deflated using the price index. Since 1992, the price index has risen above 100, indicating that there has been inflation, and therefore nominal GDP must be deflated to calculate real GDP. Prior to 1992, the price index was below 100, indicating deflation, which means that nominal GDP would actually need to be inflated to calculate real GDP (making choice B incorrect). Real GDP has grown over this time period, as shown by the upward trend in the blue line, but nominal GDP has not necessarily grown at the same rate due to inflation/deflation. Therefore, choice C is also incorrect. Choice A is a generalization that cannot be confirmed with the information given on the graph.

Refer to the Above Diagram