GDP Deflator

Correct answer: C. It will remain unchanged

Explanation: The GDP deflator is a price index: Deflator = nominal GDP / real GDP × 100. When prices remain unchanged, a 25% increase in quantities raises nominal and real GDP by the same proportion. Their ratio therefore does not change, so the deflator remains unchanged. Option C is correct; the other choices incorrectly treat output growth as price inflation.

Correct answer: A. It will fall by about 9.1 percent

Explanation: Use Deflator = nominal GDP / real GDP × 100. If nominal GDP is unchanged and real GDP becomes 1.10 times its original value, the deflator becomes 1/1.10 = 0.9091 times its original value. Hence it falls by about 1 − 0.9091 = 9.1%. Option A is correct; a 10% denominator rise does not imply a 10% fall in the ratio.

Correct answer: B. It will fall by 9 percent

Explanation: Because the deflator equals nominal GDP divided by real GDP times 100, an unchanged real GDP makes the deflator move in the same proportion as nominal GDP. A 9% fall in nominal GDP therefore causes a 9% fall in the deflator. Option B is correct. It cannot rise or remain unchanged, and 18% doubles the stated change without justification.

Correct answer: B. 125

Explanation: The GDP deflator index is calculated as nominal GDP divided by real GDP, multiplied by 100. Substituting the given indices gives (150 / 120) × 100 = 1.25 × 100 = 125. Therefore option B is correct. The real index 120 and nominal index 150 are not themselves the deflator; option C has no basis in the formula.

Correct answer: C. 140

Explanation: The identity is nominal GDP index = deflator index × real GDP index / 100. Thus nominal GDP index = 125 × 112 / 100 = 140. Option C is correct. Dividing by 100 is necessary because both inputs are index numbers; option A merely repeats the deflator, while 130 and 150 do not satisfy the identity.

Correct answer: B. 110

Explanation: Use the GDP identity: real GDP index = nominal GDP index / deflator index × 100. Substitution gives (132 / 120) × 100 = 1.1 × 100 = 110. Therefore option B is correct. The deflator removes the price effect from nominal GDP; 105, 115 and 120 do not produce the given nominal index when combined with a deflator of 120.

Correct answer: C. 21 percent

Explanation: The GDP deflator is an index of the overall price level of domestically produced final goods and services. The percentage change is calculated as (new index − old index) ÷ old index × 100. Thus, (121 − 100) ÷ 100 × 100 = 21%. Therefore, option C is correct. Options A and B understate the rise, while 121% incorrectly treats the final index as the percentage increase.

Correct answer: B. 21 percent

Explanation: Successive percentage changes are applied to the updated index, not repeatedly to the original base. Starting from 100, a 10% rise gives 110 in year one. A further 10% of 110 is 11, so the year-two value is 121. The total increase is therefore 21%, also obtained from \((1.10)^2 − 1 = 0.21\). Hence option B is correct; 20% wrongly adds the rates.

Correct answer: B. 1 percent fall

Explanation: The governing concept is that percentage changes are multiplicative. If the initial deflator is 100, a 10% rise makes it 110. A 10% fall in the second year is calculated on 110, so the final value is 110 × 0.90 = 99. Compared with 100, this is a 1% fall. Therefore option B is correct; the rise and fall do not cancel because their bases differ.

Correct answer: A. On the basis of production cost

Explanation: Government services such as public administration, defence, or certain public education services may not be sold at observable market prices. National accounting therefore commonly estimates their value from the cost of producing them, including relevant compensation and operating costs. Option A is correct. Profit cannot be the general basis because these services may not be sold for profit, and foreign prices or zero valuation would not represent their domestic production.

Correct answer: A. Because it is not new production of the current year

Explanation: GDP and its deflator measure current production within the period. A used car or other resold good was already counted when it was first produced, so counting its full resale price again would double-count the same output. The resale transaction itself is not new production of the good. However, a current brokerage or repair service connected with the sale may be included because that service is produced in the current year. Thus option A is correct.

Correct answer: A. Because brokerage is a domestic service produced in the current year

Explanation: The governing rule is that GDP includes current production, not merely the sale of existing assets or used goods. A brokerage agency performs a service during the current year and receives a fee for arranging the transaction. That newly produced domestic service can enter GDP and therefore influence the GDP deflator. The used car itself is excluded from current output, but the brokerage is not. Options B, C, and D misclassify the nature of the service or payment.

Correct answer: A. The current weight of cheaper goods may rise

Explanation: The GDP deflator is based on the prices and quantities of goods and services produced domestically in the current period. Its expenditure weights therefore reflect the composition of current domestic output. If production shifts toward cheaper goods and their quantity share increases, those goods may receive a larger current weight. Option A is correct. The weights are not necessarily permanent, imports are not the sole basis, and a change in composition cannot make the index automatically zero.

Correct answer: B. 10 percent

Explanation: The governing concept is the GDP deflator, which compares nominal GDP with real GDP: GDP deflator = (Nominal GDP ÷ Real GDP) × 100 = (2,200 ÷ 2,000) × 100 = 110. A deflator of 110 means prices are 110% of the base-year level, or 10% higher. Therefore, option B is correct; 110 is the index value, not the percentage increase.

Correct answer: B. 20 percent

Explanation: Use the GDP deflator formula: (Nominal GDP ÷ Real GDP) × 100. Here it is (2,000 ÷ 2,500) × 100 = 80. Thus, the current price level is 80% of the base-year level, so it is 20% lower than the base year. Option B is correct. Option D gives the index number 80, while the question asks for the decrease in percentage.

Correct answer: A. It is a broad price index of domestic final output with changing weights

Explanation: The GDP deflator is a broad measure of the price level for final goods and services produced domestically. Its weights are based on the composition of current domestic output and can therefore change over time. Option A is correct. Unlike a fixed food-price index, it is not limited to food or imports, and it measures prices rather than real output quantities.

Correct answer: C. 120

Explanation: The GDP deflator is calculated as (Nominal GDP ÷ Real GDP) × 100. Substituting the values gives (1,980 ÷ 1,650) × 100 = 1.2 × 100 = 120. Therefore, option C is correct. This value also indicates that the average price level is 20% above the base-year level, because the index exceeds 100 by 20 points.

Correct answer: C. 20 percent

Explanation: Inflation is the percentage increase in the price index relative to its earlier value. The deflator rises by 156 − 130 = 26 points. Divide this change by the old deflator: (26 ÷ 130) × 100 = 20%. Therefore, option C is correct. Using 26% would incorrectly divide by 100 or treat the index-point change as the inflation rate.

Correct answer: D. 15 percent

Explanation: The percentage decline must be measured against the original, or old, deflator. The index falls by 180 − 153 = 27 points. Therefore, the decline is (27 ÷ 180) × 100 = 15%. Option D is correct. Dividing by the new value or reporting 27 points as a percentage would produce an incorrect result.

Correct answer: D. No, because it can change with current production

Explanation: Unlike a fixed-basket consumer price index, the GDP deflator is based on the composition and value of goods and services produced domestically in the current period. As production changes, the relative quantities and weights in the deflator can also change. The base year supplies the comparison benchmark, but it does not force the current production basket to remain fixed.

Correct answer: D. It remains unchanged

Explanation: The GDP deflator equals nominal GDP divided by real GDP, multiplied by 100. If both values increase by the same proportion, the ratio is unchanged: new deflator = (1.15 × nominal GDP) ÷ (1.15 × real GDP) × 100. Thus the deflator remains unchanged. A change in the deflator would require nominal and real GDP to grow at different rates.

Correct answer: C. 120

Explanation: Use the GDP-deflator formula: GDP deflator = (nominal GDP ÷ real GDP) × 100. Substituting the values gives (1,080 ÷ 900) × 100 = 1.2 × 100 = 120. Therefore, option C is correct. A value of 120 means that the overall price level of current domestic output is 20 percent higher than in the base year, assuming the base-year index is 100.

Correct answer: D. ₹600 crore

Explanation: The relationship is GDP deflator = (nominal GDP ÷ real GDP) × 100. Rearranging gives nominal GDP = real GDP × deflator ÷ 100. Therefore, nominal GDP = ₹750 crore × 80 ÷ 100 = ₹600 crore. Option D is correct. Since the deflator is below 100, the price level represented by current nominal output is lower than the base-year price level.

Correct answer: B. 12.5 percent

Explanation: The inflation rate based on an index is calculated as [(new index − old index) ÷ old index] × 100. Here the increase is 144 − 128 = 16, so inflation = (16 ÷ 128) × 100 = 12.5 percent. Option B is correct. Dividing by the new index or treating the 16-point rise as 16 percent would give misleading alternatives.

Correct answer: B. 20 percent

Explanation: For a percentage decline, use [(old value − new value) ÷ old value] × 100. The index falls by 175 − 140 = 35 points, and the percentage decline is (35 ÷ 175) × 100 = 20 percent. Therefore, option B is correct. The 35-point fall is not itself a 35 percent decline because the original index, 175, is the base for comparison.