The GDP deflator in year 2 is 110 using year 1 as a base year. This means that, on average, the price of goods and services is
A) 110% higher in year 2 than in year 1.
B) 10% higher in year 2 than in year 1.
C) 5% higher in year 1 than in year 2.
D) 110% higher in year 1 than in year 2.

Question

Quizplus · Accepted Answer

The GDP deflator is a measure of the general price level and inflation in an economy. It is calculated by dividing nominal GDP by real GDP (which is adjusted for inflation using a base year). In this case, using year 1 as the base year, the GDP deflator in year 2 is 110, which means prices have increased by 10% since year 1. Therefore, choice B is the correct answer. Choice A is incorrect because prices have not increased by 110%, but rather the GDP deflator is 110. Choice C is incorrect because it suggests that prices are higher in year 1 than year 2, which is not supported by the information given. Choice D is incorrect because it is the opposite of the correct answer.

The GDP Deflator in Year 2 Is 110 Using Year