If nominal GDP rises from $5 billion to $6 billion, when the GDP deflator goes from 100 to 130, real GDP
A)rises.
B)falls.
C)stays the same.
D)could either be rising or falling.

Question

If nominal GDP rises from $5 billion to $6 billion, when the GDP deflator goes from 100 to 130, real GDP
A)​rises.
B)​falls.
C)​stays the same.
D)​could either be rising or falling.

Quizplus · Accepted Answer

Nominal GDP increased from $5 billion to $6 billion, which is a 20% increase. However, the GDP deflator also increased from 100 to 130, which means prices increased by 30%. Therefore, the increase in nominal GDP is entirely due to the increase in prices, and there has been no real increase in output. Real GDP is calculated by dividing nominal GDP by the GDP deflator, so:
Real GDP = Nominal GDP / GDP Deflator
Real GDP in the initial year was $5 billion / 100 = $50 billion
Real GDP in the final year is $6 billion / 130 = $46.15 billion
Thus, real GDP fell from $50 billion to $46.15 billion.

If Nominal GDP Rises from $5 Billion to $6 Billion