Question:
Suppose GDP of a country in current prices increased by approximately 8% between one period and the next, but real GDP fell by 2% in the same period. Which one of the following explanations is most likely?
(1) General price level fell by 4%.
(2) General price level fell by 8%.
(3) General price level increased by 4%.
(4) General price level increased by 8%.
(5) General price level increased by 10%.
Correct Answer:
(5)
Answer Explanation:
Nominal GDP (current prices) reflects both output changes and price changes. If actual physical output (Real GDP) fell by 2%, but the monetary value of that output (Nominal GDP) still managed to rise by 8%, the prices must have inflated significantly to mask the drop in output. Mathematically, $1.08 / 0.98 = 1.102$, meaning prices inflated by roughly 10%.
Topic: Inflation Year: 2017
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