Question

4.. What would it mean or what is occurring in the economy if an economy had real GDP increasing faster than nominal GDP? (One sentence maximum only)

Answer 1

Answer 4

Real GDP is increasing faster than nominal GDP means that price level is decreasing or we can say that deflation occurs.

EXPLANATION:

Nominal GDP = (Real GDP*Price level)------------------------(1)

Formula :

% change in (A*B) = % change in (A) + % change in (B) -------------------------(2)

From (1) and (2) we have :

% change in (Nominal GDP) = % change in (Real GDP* Price level)

= % change in (Real GDP) + % change in (price level)

=> % change in (price level) = % change in (Nominal GDP) - % change in (real GDP)

It is given that Real GDP is increasing faster than Nominal GDP=> % change in (Nominal GDP) - % change in (real GDP) < 0

Hence, % change in (price level) = % change in (Nominal GDP) - % change in (real GDP) < 0

=> % change in (price level) < 0

Hence Price level is decreasing and thus deflation occurs.