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If nominal GDP rises by twelve percent but the price level rises by ten percent, what can be said about real growth?

Answer and explanation

Correct answer: Real growth is much lower than nominal growth

The governing concept is the distinction between nominal GDP and real GDP. Nominal GDP reflects both changes in quantities and prices, whereas real GDP removes the price effect. Using the approximate relation, real growth is about 12% − 10% = 2%; the exact rate would be 1.82% if the price index rose by 10%. Therefore, real growth is positive but much lower than nominal growth, making B the best option.

Related tags

Nominal GdpReal GdpPrice LevelGdp And WelfareNational Income And Related AggregatesEconomicsClass 11 Mcq

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