Final answer:
Nominal GDP and real GDP both increased if last year saw a rise in both the price level and production of goods and services. Nominal GDP reflects current prices, while real GDP adjusts for inflation, offering a truer picture of economic growth.
Step-by-step explanation:
If last year the price level increased and the production of goods and services also increased, the correct answer is: d. increased and real GDP increased. This is because nominal GDP increases when there is an uptick in production, prices, or both. Since it's given that both the price level and the production of goods and services have increased, nominal GDP would have necessarily gone up. Moreover, the increase in production means that real GDP, which is adjusted for inflation, would also show an increase, albeit not necessarily in the same proportion as the nominal GDP due to the effect of the raised price level.
Nominal GDP is a measure of the country's economic output based on current prices, and doesn't account for inflation. Real GDP, on the other hand, adjusts for inflation and provides a more accurate reflection of an economy's size and how much it is truly growing. The GDP deflator is a tool that helps in this adjustment by extracting the effects of price changes. Since a rise in the price level alone can amplify the growth in nominal GDP, it's essential to use the deflator to assess the true expansion in an economy's output.