If nominal GDP rises by 10% while the price level rises by 12%, what does this indicate about real output and welfare?
Answer and explanation
Correct answer: Real output has approximately decreased
The governing relationship is nominal GDP growth approximately equal to real GDP growth plus inflation. Using the growth-rate approximation, real GDP growth is about 10% − 12% = −2%, so real output has approximately fallen. The exact calculation, 1.10/1.12 − 1, is about −1.8%, confirming option B. C would require nominal growth to match inflation, while D makes an unsupported welfare claim.
Frequently asked questions
What is the correct answer to this question?
Real output has approximately decreased
Why is this the correct answer?
The governing relationship is nominal GDP growth approximately equal to real GDP growth plus inflation. Using the growth-rate approximation, real GDP growth is about 10% − 12% = −2%, so real output has approximately fallen. The exact calculation, 1.10/1.12 − 1, is about −1.8%, confirming option B. C would require nominal growth to match inflation, while D makes an unsupported welfare claim.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
