Final answer:
Country D is facing the economic challenge of inflation, where rising prices are not matched by wage increases, leading to a decrease in purchasing power and a potential decline in real GDP.
Step-by-step explanation:
Country D is facing a significant economic challenge known as inflation. This phenomenon is characterized by the average prices of goods rising without a commensurate increase in wages, which decreases purchasing power and overall demand. This can result in a decline in Gross Domestic Product (GDP), which measures the value of output of goods and services. When only nominal GDP increases due to higher price levels, without a real increase in output, the economy isn't actually growing, and it doesn't reflect an increase in the economic well-being of its citizens.
Furthermore, the imbalance between wage growth and price increases may lead to a deceleration in economic activity, potentially indicating the onset of a recession, which is a significant decline in GDP. This economic contraction can be exacerbated by government deficits and related policy responses, such as spending cuts and tax increases that have a contractionary effect on aggregate demand.