Suppose a small economy produces only MP3 players. In year one, 10,000 MP3 players are produced and sold at a price of $100 each. In year two, 12,000 MP3 players are produced and sold
At a price of $80 each. Which of the following statements is true?
A) Real GDP and nominal GDP both increase.
B) Real GDP increases, while nominal GDP remains constant.
C) Real GDP decreases, while nominal GDP increases.
D) Real GDP increases, while nominal GDP decreases.

Question

Quizplus · Accepted Answer

Nominal GDP is calculated using current market prices, so it will decrease from year one to year two due to the decrease in price per unit. However, real GDP is adjusted for inflation and is calculated using a constant price level, so it will increase from year one to year two as the economy produces more MP3 players. Therefore, the correct answer is D - real GDP increases while nominal GDP decreases.

Suppose a Small Economy Produces Only MP3 Players