Question

If real GDP is increasing at 5% per year and nominal GDP is increasing at 10% per year, which of the following is necessarily true? a) Inflation rate is 5% per year b) Inflation rate is 10% per year c) Inflation rate is 15% per year d) Inflation rate is 0% per year

Answer 1

Explanation:

To calculate the inflation rate, you can use the formula:

Inflation Rate = (Nominal GDP Growth Rate) - (Real GDP Growth Rate)

In this case:

Nominal GDP Growth Rate = 10% per year

Real GDP Growth Rate = 5% per year

Now, plug these values into the formula:

Inflation Rate = (10%) - (5%) = 5%

So, the correct answer is:

a) Inflation rate is 5% per year