Assume that between 1995 and 2000 nominal GDP increased from $1,000 to $2,500,and the index of prices increased from 100 to 200.Which of the following expresses GDP for 2000 in terms of 1995 prices?
A)$1,000
B)$1,250
C)$2,500
D)$5,000

Question

Quizplus · Accepted Answer

To adjust GDP for inflation, we need to use the base year prices (1995 prices).
Real GDP in 2000 = nominal GDP in 2000 / price level in 2000 = $2,500 / 200 = $12.50 trillion.
Real GDP in 1995 = nominal GDP in 1995 / price level in 1995 = $1,000 / 100 = $10 trillion.
Therefore, 2000 GDP in terms of 1995 prices = $12.50 trillion * (1995 price level / 2000 price level) = $12.50 trillion * (100 / 200) = $6.25 trillion.
So, the answer is B) $1,250.

Assume That Between 1995 and 2000 Nominal GDP Increased from $1,000