Question

If all quantities produced rise by 10%, and all prices fall by 10%, which of the following occurs?

a) Real GDP increases by 10%
b) Real GDP decreases by 10%
c) Real GDP remains unchanged
d) Real GDP increases by 1%

Answer 1

Real GDP remains unchanged if all quantities produced rise by 10% and all prices fall by 10%, since the percentage increase in quantity is exactly offset by the percentage decrease in prices.

Step-by-step explanation:

If all quantities produced rise by 10%, and all prices fall by 10%, the correct answer to what happens to real GDP is (c) Real GDP remains unchanged.

Using the formula for percentage change in real GDP, which is the sum of percent change in price and percent change in quantity:

• % change in real GDP = % change in price + % change in quantity

In this case, the % change in quantity is +10%, and the % change in price is -10%:
% change in real GDP = (-10%) + (+10%) = 0%

Therefore, the growth rate in nominal GDP is offset by the change in prices, resulting in no change in the real GDP.