Question

YearNominal GDP Price Index 2 3 4 $550 560 576 586 604 $140 135 120 108 In the economy described in the table, Multiple Choice the price level is rising faster than nominal GDP nominal and real GDP are growing at the same rate. the growth of nominal GDP understates the growth of real GDP. the growth of nominal GDP overstates the growth of real GDP.

Answer 1

Growth rate of real GDP, nominal GDP and price level can be calculated from following formula: Real GDP = Nominal GDP- Price Index Real GDP - Real GDP, |x100 Growth rate of real GDP = Real GDP Nominal GDP, - Nominal GDP. Nominal GDP Growth rate of nominal GDP = x100 Price level - Price level Price level -x100 Growth rate of Price level Growth Growth Growth rate of rate of rate of nominal real GDP Nominal GDP 550 560 576 586 604 Real GDP 140 price index Price index Year GDP 410 425 1.81818 3.65854 -3.5714| 456 2.85714 7.29412 -11.111 469 1.73611 2.85088 496 3.07167 5.75693 -7.6923 135 3 120 -2.5 117 108 5 Table 1 As shown in table 1, the growth of nominal GDP understates the growth of real GDP. Hence, option C is correct.