Assume nominal GDP was $16.0 trillion in Year 1 and $17.6 trillion in Year 2.If Year 1 is the base year, then

Question

Quizplus · Accepted Answer

In order to calculate the GDP-deflator, we need to divide nominal GDP by real GDP and multiply by 100. Since Year 1 is the base year, its real GDP is equal to its nominal GDP. Therefore, the GDP-deflator for Year 1 is 100. For Year 2, we need to calculate real GDP using the prices from Year 1. Real GDP in Year 2 is (Nominal GDP in Year 2/Price level in Year 1) x 100 = (17.6/16) x 100 = 110. Therefore, the GDP-deflator for Year 2 is 110. This means that prices increased on average by 10% from Year 1 to Year 2. Real GDP did change because it increased from $16.0 trillion to $16.0 trillion x (110/100) = $17.6 trillion. Therefore, both statements A and B are true, and statement C is false. Hence, the correct answer is E.

Assume Nominal GDP Was $16