Question

In 2010, real GDP was $13.20 trillion (using 2005 prices), and nominal GDP was $14.45 trillion. Based on the GDP deflator, prices in 2010 were about _____ than prices in 2005.

a) 8.7% lower
b) 8.7% higher
c) 9.5% lower
d) 9.5% higher
e) 10.5% lower
f) 10.5% higher

Answer 1

Using real and nominal GDP values from 2010 and the GDP deflator, it was calculated that prices in 2010 were about 9.5% higher than in 2005, making option (d) the correct answer.

Step-by-step explanation:

The student is asking about the difference between real GDP and nominal GDP in 2010, and how this relates to price levels in comparison to the base year, 2005. To determine how prices in 2010 compare to prices in 2005 using the GDP deflator:

Real GDP = Nominal GDP / (Price Index / 100)

Substituting the given values:

$13.20 trillion = $14.45 trillion / (Price Index / 100)

Solving for the Price Index gives us 110, which indicates the prices in 2010 are about 10% higher than in 2005 (since 110 - 100 = 10). Therefore, the correct answer is that prices in 2010 were about 9.5% higher than prices in 2005, corresponding to option (d).