Question

It is estimated that if the inflation rate is lowered from 3 percent a year to 0 percent a year, the growth rate of real gdp will rise by ____________ percentage points a year.

a. 0.06 to 0.09
b. 3.2
c. 2.3
d. 1 to 3
e. 0

Answer 1

If the inflation rate drops from 3% to 0% per year, the growth rate of real GDP is expected to increase by 1 to 3 percentage points annually, reflecting a potentially more robust economic growth.

Step-by-step explanation:

It is estimated that if the inflation rate is lowered from 3 percent a year to 0 percent a year, the growth rate of real GDP will rise by 1 to 3 percentage points a year. The choice of range allows for the fact that the impact of inflation on real GDP growth can vary. Inflation impacts the economy differently based on its rate: whether it's creeping up slowly or galloping along. Lower inflation rates can certainly improve the purchasing power of money and potentially stimulate economic growth.

Historical data from the 1980s reveals that a significant portion of GDP growth can be attributed to inflation rather than actual economic growth. Understanding the difference between nominal GDP growth and real GDP growth is crucial because it helps in measuring the true expansion of an economy, stripping out the effects of inflation.