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

Question

Quizplus · Accepted Answer

Underestimating the growth in real GDP implies that the actual economic growth is higher than measured. Since the price level (or inflation) is calculated based on the ratio of nominal GDP to real GDP, underestimating real GDP would lead to an overestimation of the price level or the rate of inflation. This is because the denominator (real GDP) in the calculation is smaller than it should be, making the inflation rate appear higher.

When We Try to Measure Real GDP and the Price