GDP Deflator

Correct answer: A. 20 percent increase

Explanation: Successive percentage changes apply to different base values, so they must be calculated using multipliers. Take the initial deflator as 100. After a 50% rise, it becomes 150; a 20% fall from 150 leaves 120. Thus the final value is 120 compared with the initial 100, giving a total increase of 20%. Option A is correct; simply adding 50% and subtracting 20% would incorrectly give 30%.

Correct answer: B. 9 percent decrease

Explanation: Equal percentage decreases and increases do not cancel when they occur successively, because the second change uses a new base. If the initial deflator is 100, a 30% fall gives 70. A 30% rise on 70 equals 21, so the final value is 91. Compared with 100, the overall change is a 9% decrease. Option B is correct; the no-change answer wrongly treats both percentages as based on 100.

Correct answer: B. 26.2 percent

Explanation: The governing concept is compound growth: each 6% increase is applied to the previous year’s deflator, not to the original value alone. The cumulative multiplier is \((1.06)^4\) = approximately 1.2625. Hence the total increase is \((1.2625 − 1) × 100 ≈ 26.25\%\), or about 26.2%. Option B is correct. Option A merely adds 6% four times and ignores compounding.

Correct answer: B. 10.4 percent

Explanation: First calculate each year’s deflator using (Nominal GDP ÷ Real GDP) × 100. Year one: (2000 ÷ 1600) × 100 = 125. Year two: (2484 ÷ 1800) × 100 = 138. The growth rate is [(138 − 125) ÷ 125] × 100 = 10.4%. Hence option B is correct. Comparing nominal GDP alone would mix price and output changes and would not measure deflator growth.

Correct answer: A. About 3 percent rise

Explanation: Nominal GDP reflects both real output and the price level, so their percentage factors must be multiplied. A 12% rise in real GDP gives a factor of 1.12, while an 8% fall in the deflator gives 0.92. Their product is 1.12 × 0.92 = 1.0304, meaning a 3.04% increase. Thus option A is correct. Adding 12% and −8% gives the same approximation but not the exact multiplicative result.

Correct answer: A. Both the price level and real output have risen

Explanation: The GDP deflator is a price index for domestically produced final goods and services, so a rising deflator indicates a higher overall price level. Rising real GDP indicates that production volume has increased after removing price effects. Since nominal GDP equals the product of real GDP and the deflator, it would also rise when both factors rise. Therefore A is correct; B and C omit one fact, and D contradicts the relationship.

Correct answer: B. Only the price of the current brokerage service

Explanation: GDP and its deflator cover current production during the period. A used machine was produced in an earlier period, so its resale price is not counted again as current domestic output. Brokerage, however, is a service supplied in the current period and its fee represents current production. Therefore only the current brokerage service price is included. Options A and D wrongly include the used machine itself, while C omits a current service.

Correct answer: B. No because the index level and its growth rate are different

Explanation: An index level shows the price level relative to its own base period, whereas the inflation rate is the percentage change in that index over a specified time interval. One country can have a higher accumulated deflator level but a slower current-year increase than another country. Cross-country comparisons may also involve different base years or methods. Thus a higher level does not necessarily imply a higher inflation rate, making B correct.

Correct answer: C. 25 percent

Explanation: The percentage change must be calculated relative to the original deflator, 72, not merely from the 18-point increase. The increase is 90 − 72 = 18 points. Therefore, percentage increase = (18 ÷ 72) × 100 = 25%. Hence option C is correct. Option A reports only the index-point change, while the other options use an incorrect denominator or calculation.

Correct answer: B. 25 percent

Explanation: The decrease is measured against the original deflator of 240. The fall equals 240 − 180 = 60 points. Thus, percentage decline = (60 ÷ 240) × 100 = 25%. Option B is therefore correct. Option D gives the absolute point decline rather than the percentage decline; options A and C do not follow the required base-value calculation.

Correct answer: C. 3.2 to 1

Explanation: The GDP deflator is defined as (Nominal GDP ÷ Real GDP) × 100. Hence, Nominal GDP ÷ Real GDP = 320 ÷ 100 = 3.2. Therefore, nominal GDP is 3.2 times real GDP, so the required ratio is 3.2:1. Option A reverses the ratio, while option D incorrectly treats the index number itself as the ratio without removing the factor of 100.

Correct answer: A. \(\frac{3}{8}\)

Explanation: The governing relationship is GDP Deflator = (Nominal GDP ÷ Real GDP) × 100. Substituting 37.5 gives Nominal GDP ÷ Real GDP = 37.5 ÷ 100 = 0.375. Converting the decimal to a fraction, 0.375 = 375/1000 = 3/8. Thus option A is correct; 3/4 would imply a deflator of 75, not 37.5.

Correct answer: C. 180

Explanation: The deflator equals (value at current prices ÷ value at base-year prices) × 100. Because the quantity is the same in both calculations, quantity cancels and the ratio depends only on prices. A price 80% above the base price equals 1.80 times that price. Therefore, the deflator is 1.80 × 100 = 180. Option 80 is only the increase rate.

Correct answer: B. 65

Explanation: A price 35% below the base-year price is 100% − 35% = 65% of the base-year price. Since quantity is identical in the two valuations, the quantity terms cancel. Thus, the deflator = (current-price value ÷ base-price value) × 100 = 65. Option 35 confuses the fall with the remaining price level, while 100 would mean no price change.

Correct answer: A. It must rise

Explanation: The deflator relation can be written as Nominal GDP = Real GDP × (Deflator ÷ 100). If the deflator increases, the price-level factor increases; if real GDP also increases, the real-output factor increases as well. The product of two positive rising factors must rise. Hence nominal GDP must rise. A fall or no change would contradict this relationship.

Correct answer: A. It remains unchanged

Explanation: Use Deflator = (Nominal GDP ÷ Real GDP) × 100. Initially, it is (2200 ÷ 1760) × 100 = 125. In the later period, it is (2640 ÷ 2112) × 100 = 125 as well. Although both nominal and real GDP rise by the same proportion, their ratio does not change. Therefore, the deflator remains unchanged, making option A correct.

Correct answer: C. 140

Explanation: The new GDP deflator is calculated as (Nominal GDP ÷ Real GDP) × 100. Substituting the new values gives (2310 ÷ 1650) × 100. Since 2310 ÷ 1650 = 1.4, the deflator equals 140. The fall in real GDP combined with the rise in nominal GDP makes the ratio larger. The other choices result from incorrect division or percentage interpretation.

Correct answer: B. 16.67 percent

Explanation: The governing concept is percentage change in the price index, not merely the index-point difference. Inflation rate = [(Final deflator − Initial deflator) / Initial deflator] × 100 = [(140 − 120) / 120] × 100 = 20/120 × 100 = 16.67 percent approximately. Therefore, option B is correct. Option C gives the 20-point increase as a percentage, while option D incorrectly uses the final index itself.

Correct answer: A. Their coverage and weights are different

Explanation: The governing concept is the difference in construction of price indices. The GDP deflator measures prices of domestically produced final goods and services, with changing output weights. CPI measures the cost of a specified consumer basket, including relevant imported consumer goods, with household-consumption weights. Hence their coverage and weights differ, so option A is correct. The other statements are absolute or factually wrong.

Correct answer: A. Nominal GDP and GDP deflator

Explanation: The governing concept is the separation of nominal and real changes. Nominal GDP values current output at current prices, so it reflects both quantities and prices. The GDP deflator captures the price component for domestically produced final output. Using the deflator, real GDP can be obtained as Nominal GDP ÷ Deflator × 100, allowing policymakers to identify actual output growth. Therefore option A is correct; the other pairs do not perform this decomposition.

Correct answer: C. 140

Explanation: The governing formula is GDP deflator = (Nominal GDP / Real GDP) × 100. Substituting the given values gives (2,520 / 1,800) × 100 = 1.4 × 100 = 140. Thus, option C is correct. A deflator of 140 indicates that the measured price level of current domestic final output is 40 percent above the base-year level, assuming the index uses 100 for the base year.

Correct answer: C. 135

Explanation: The governing concept is the ratio of nominal GDP to real GDP. GDP deflator = (Nominal GDP / Real GDP) × 100 = (2,835 / 2,100) × 100. Since 2,100 × 1.35 = 2,835, the ratio is 1.35 and the index equals 135. Therefore option C is correct. The other options result from using an incorrect ratio or from failing to multiply the ratio by 100.

Correct answer: C. ₹3,760 crore

Explanation: The governing relationship is Deflator = (Nominal GDP / Real GDP) × 100. Rearranging gives Nominal GDP = Real GDP × Deflator / 100. Therefore, nominal GDP = 3,200 × 117.5/100 = 3,200 × 1.175 = ₹3,760 crore. Option C is correct. The distractors reflect arithmetic errors or treating 117.5 as a multiplier rather than an index to be divided by 100.

Correct answer: C. ₹2,400 crore

Explanation: The governing formula is Real GDP = (Nominal GDP / GDP deflator) × 100. Substitution gives Real GDP = (3,312 / 138) × 100. Since 138 × 24 = 3,312, the result is 24 × 100 = ₹2,400 crore. Hence option C is correct. The deflator is divided into nominal GDP and then the result is multiplied by 100 because the index is expressed with a base of 100.

Correct answer: B. 10 percent

Explanation: The governing concept is percentage change relative to the initial index. Inflation rate = [(Final deflator − Initial deflator) / Initial deflator] × 100. Here the increase is 171.6 − 156 = 15.6 points, and 15.6/156 × 100 = 0.10 × 100 = 10 percent. Therefore option B is correct. Option D mistakes the index-point increase for the percentage rate, while the other choices use incorrect denominators.