For the following question(s), suppose that an economy produces only bread and computers. Assume that all production is consumed in each year, and that price and quantity data are given in the table below.

-When we try to measure real GDP and the price level, if we underestimate the growth in real GDP, we will
A) always underestimate the rate of inflation.
B) sometimes underestimate the rate of inflation.
C) always overestimate the rate of inflation.
D) sometimes overestimate the rate of inflation.
E) not be able to measure the rate of inflation.

Question

For the following question(s), suppose that an economy produces only bread and computers. Assume that all production is consumed in each year, and that price and quantity data are given in the table below.
 
-When we try to measure real GDP and the price level, if we underestimate the growth in real GDP, we will
A) always underestimate the rate of inflation. 
B) sometimes underestimate the rate of inflation. 
C) always overestimate the rate of inflation. 
D) sometimes overestimate the rate of inflation. 
E) not be able to measure the rate of inflation.

Quizplus · Accepted Answer

Underestimating real GDP growth implies that the economy is producing more than measured, leading to an overestimation of inflation since the price level increase appears larger relative to the underestimated output growth.

For the Following Question(s), Suppose That an Economy Produces Only