Question

A country reported nominal GDP of $100 billion in 2006 and $75 billion in 2005; it reported a GDP deflator of 125 in 2006 and 120 in 2005. Between 2005 and 2006, a.real output and the price level both rose.b.real output rose and the price level fell.c.real output fell and the price level rose.d.real output and the price level both fell.____

Answer 1

Option (A) is correct.

Step-by-step explanation:

GDP deflator refers to the measure of prices of all the final goods and services produced domestically. Therefore, it can be seen that GDP deflator increases from 120 in 2005 to 125 in 2006. So, there is an increase in the price level.

In 2005:

Nominal GDP = $75 billion

GDP deflator = 120

In 2006:

Nominal GDP = $100 billion

GDP deflator = 125

Percentage increase in GDP deflator = [(125 - 120) ÷ 120] × 100

= 4.17%

Percentage increase in Nominal GDP = [(100 - 75) ÷ 75] × 100

= 33.33%

Since the percentage increase in nominal GDP is greater than the percentage increase in GDP deflator, so real output rise over time.