If a particular measure of real GDP consistently underestimates growth in real GDP,then the rate of inflation as measured by the GDP deflator
A) will consistently be overestimated.
B) will consistently be underestimated.
C) will be overestimated and underestimated equally often.
D) cannot be calculated.
E) is not a good predictor of the inflation rate in the CPI.

Question

Quizplus · Accepted Answer

If real GDP is consistently underestimated, it means that the economy is actually growing faster than what is being measured. Therefore, the GDP deflator, which is used to measure the rate of inflation in the economy, will overestimate inflation since it is based on a lower estimate of real GDP. This is because the formula for calculating the GDP deflator is based on nominal GDP divided by real GDP, so if real GDP is understated, the GDP deflator will overestimate inflation.

If a Particular Measure of Real GDP Consistently Underestimates Growth