Suppose, in dollar terms, nominal GDP increased approximately 4 percent during a given year, and real GDP decreased 1 percent. Which of the following best explains these events?
A) The money supply increased approximately 4 percent.
B) Prices decreased approximately 3 percent.
C) Prices increased approximately 4 percent.
D) Prices increased approximately 5 percent.

Question

Quizplus · Accepted Answer

Nominal GDP accounts for both changes in quantity and price levels, while real GDP accounts for changes in quantity only. If nominal GDP increased by 4% and real GDP decreased by 1%, this implies that the price level (inflation) must have increased by approximately 5% to account for the difference.

Suppose, in Dollar Terms, Nominal GDP Increased Approximately 4 Percent