Question

Suppose that the nominal value of GDP increased by approximately 2 percent during a given year, but real GDP decreased by 3 percent. Which of the following best explains these eventsa. The money supply decreased by approximately 5 percent.

b. Prices fell by approximately 5 percent.
c. Prices increased by approximately 5 percent.
d. The real productive capacity of the economy increased by approximately 5 percent.

Answer 1

b. Prices fell by at least by approximately 5%.

Step-by-step explanation:

we know that nominal GDP(Gross Domestic Product) is when a basket of goods and services price is calculated per basket without adjusting to inflation but on Real GDP it is adjusted to inflation therefore we will see that if Real GDP decreases this will mean a negative GDP deflator that will be negative which will tell us that the prices in this economy for a basket of goods and services decreased during that year cause deflation was seen with a decrease in Real GDP.