When the CPI is 300, a real GDP of $8 trillion is demanded in a given year. If the CPI is 250, which of the following could be the real GDP demanded?
A) $10 trillion
B) $8 trillion
C) $6 trillion
D) $4 trillion

Question

Quizplus · Accepted Answer

The CPI measures the level of prices for a basket of goods and services in an economy. When the CPI increases, it means that the overall level of prices has increased. In this scenario, if the CPI decreases from 300 to 250, it means that the overall level of prices has decreased.

Real GDP measures the value of goods and services produced in an economy adjusted for inflation (or changes in the overall level of prices). If the CPI decreases, it means that real GDP has increased (assuming nominal GDP, or the value of goods and services produced in current dollars, stays the same).

Therefore, if the CPI decreases from 300 to 250 and real GDP is still $8 trillion, it means that the economy is producing more goods and services for the same nominal value. This suggests that the economy has become more efficient and productive.

Since real GDP can increase when the CPI decreases, the answer is A) $10 trillion could be the real GDP demanded.

When the CPI Is 300, a Real GDP of $8