If a price index rises from one year to the next:
A)all prices must be rising
B)nominal GDP must be rising
C)real GDP must be rising
D)real GDP must be falling
E)some individual prices may fall or stay the same, and nominal or real GDP may fall or stay the same

Question

Quizplus · Accepted Answer

A price index measures the average price level across a basket of goods and services. A rise in the price index means that, on average, prices have gone up. However, this does not necessarily mean that all individual prices have gone up. Some prices may have stayed the same or even gone down, but the overall average has gone up. Additionally, nominal GDP (which includes the effects of price changes) could be rising or falling, while real GDP (which adjusts for the effects of price changes) could also be rising or falling. Therefore, the correct answer is E.

If a Price Index Rises from One Year to the Next