Question

If real gross domestic product (GDP) in a particular year is $5,000 trillion and nominal gross domestic product (GDP) in that same year is $4,000 trillion, then the :

A. consumer price index (CPI) is 125.
B. economic activity has decreased by 40 percent.
C. GDP price index is 125.
D. there was no inflation from the base period.
E. economy has grown by 30 percent.

Answer 1

The GDP deflator is found using the formula: (Nominal GDP / Real GDP) x 100. Based on the given values of real GDP ($5,000 trillion) and nominal GDP ($4,000 trillion), the GDP deflator would be 80, which indicates deflation. Thus, none of the provided answer choices A through E are correct in this scenario.

Step-by-step explanation:

If the real GDP in a particular year is $5,000 trillion and the nominal GDP in that same year is $4,000 trillion, we use these figures to understand the economy's price level for that year. To find the GDP deflator (also known as the GDP price index), we follow the formula:

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

Substituting the given values gives us (4000 / 5000) × 100 = 80. This indicates that the price level, when compared to the base year, has decreased, implying that nominal values have to be deflated to reflect real values. However, the question choices suggest a price index of 125, which would be the case if nominal GDP was higher than real GDP, not lower. Therefore, none of the given choices A through E correctly describe the situation based on the values presented in the question.