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 be biased upward.
B) will be biased downward.
C) will be unbiased.
D) cannot be calculated.

Question

Quizplus · Accepted Answer

If real GDP is consistently underestimated, it means that the nominal GDP is actually higher than what is being measured. The GDP deflator is calculated by dividing nominal GDP by real GDP, so if nominal GDP is higher than the measured real GDP, this will lead to a smaller deflator figure. This smaller figure will make inflation appear lower than it actually is, leading to a bias in the upward direction.

If a Particular Measure of Real GDP Consistently Underestimates Growth