GDP Deflator

Correct answer: B. The second economy

Explanation: The governing relationship is Real GDP = (Nominal GDP ÷ GDP deflator) × 100. For the first economy, real GDP = (3000 ÷ 150) × 100 = ₹2000 crore. For the second, it is (2800 ÷ 112) × 100 = ₹2500 crore. Hence, the second economy has the higher real GDP, so option B is correct. Comparing nominal GDP alone would be misleading because the price levels differ.

Correct answer: A. The first will have higher nominal GDP

Explanation: The governing identity is Nominal GDP = Real GDP × GDP deflator ÷ 100. Since the two economies have the same real GDP, the economy with the larger deflator must have the larger nominal GDP. The higher deflator represents a higher average price level, not higher physical output. Therefore the first economy has higher nominal GDP, making option A correct; option D contradicts the stated equality of real GDP.

Correct answer: B. The second economy

Explanation: Real GDP is calculated as (Nominal GDP ÷ GDP deflator) × 100. Because nominal GDP is equal in both economies, the economy with the lower deflator will have the larger real GDP after adjustment for prices. The second economy has the lower deflator, so its real GDP is higher. Option A incorrectly treats the higher price level as higher output, while option C ignores the different deflators.

Correct answer: A. 4.55 percent fall

Explanation: Real GDP changes by the ratio of the nominal-GDP growth factor to the deflator growth factor. Thus, the real GDP factor is 1.05 ÷ 1.10 = 0.954545... The change is (0.954545 − 1) × 100 ≈ −4.55%. Therefore real GDP falls by approximately 4.55%, so option A is correct. Simply subtracting 10% from 5% gives the wrong method because percentage changes compound through ratios.

Correct answer: B. 6.25 percent

Explanation: Use Real GDP = Nominal GDP ÷ Deflator, so compare the new-to-old factors rather than subtracting percentage changes. The nominal GDP factor is 0.85 and the deflator factor is 0.80. Therefore, the real GDP factor is 0.85 ÷ 0.80 = 1.0625. Real GDP consequently rises by (1.0625 − 1) × 100 = 6.25%. Hence option B is correct; 5% is only the rough difference between the stated rates.

Correct answer: B. 14.48 percent

Explanation: The governing identity is Nominal GDP = Real GDP × GDP deflator, with both expressed as index factors. A 6% rise gives a factor of 1.06 and an 8% rise gives a factor of 1.08. Their product is 1.06 × 1.08 = 1.1448, so nominal GDP rises by 0.1448 × 100 = 14.48%. Option B is correct. Adding 6% and 8% gives only an approximation and misses the interaction term of 0.48%.

Correct answer: A. 0.8 percent rise

Explanation: Nominal GDP equals real GDP multiplied by the GDP deflator. A 10% fall in real GDP produces a factor of 0.90, while a 12% rise in the deflator produces a factor of 1.12. The combined factor is 0.90 × 1.12 = 1.008. Thus nominal GDP rises by (1.008 − 1) × 100 = 0.8%. Option A is correct. Subtracting 10% from 12% gives 2%, but direct subtraction ignores the multiplicative interaction.

Correct answer: A. It remains unchanged

Explanation: The governing identity is Nominal GDP = Real GDP × GDP deflator. A 25% rise in real GDP is a multiplier of 1.25, and a 20% fall in the deflator is a multiplier of 0.80. Their product is 1.25 × 0.80 = 1.00, meaning the new nominal GDP equals the original nominal GDP. Therefore it remains unchanged, so option A is correct. Directly subtracting 20% from 25% would incorrectly suggest a 5% rise.

Correct answer: A. It remains unchanged

Explanation: Nominal GDP is obtained by multiplying real GDP by the GDP deflator, after applying the same base convention. Halving real GDP gives a factor of 0.5, while doubling the deflator gives a factor of 2. Their combined factor is 0.5 × 2 = 1. Therefore the fall in physical output is exactly offset by the rise in the price-level measure, leaving nominal GDP unchanged. Option A is correct; the other options consider only one factor or multiply them incorrectly.

Correct answer: A. 0 percent

Explanation: Real GDP is calculated by dividing nominal GDP by the GDP deflator. A 50% increase in nominal GDP gives a factor of 1.50, and a 50% increase in the deflator also gives a factor of 1.50. The real GDP factor is therefore 1.50 ÷ 1.50 = 1.00, which means no change. Hence real GDP growth is 0%, so option A is correct. The 50% choice describes nominal GDP and fails to remove the price-level effect.

Correct answer: C. 2.5 to 1

Explanation: The GDP deflator is calculated as (Nominal GDP ÷ Real GDP) × 100. Therefore, 250 = (Nominal GDP ÷ Real GDP) × 100, so Nominal GDP ÷ Real GDP = 250 ÷ 100 = 2.5. Hence, nominal GDP is 2.5 times real GDP, giving a ratio of 2.5:1. Options A, B and D do not apply the required division by 100.

Correct answer: A. Five-eighths

Explanation: The GDP deflator equals (Nominal GDP ÷ Real GDP) × 100. Thus, the nominal-to-real GDP proportion is 62.5 ÷ 100 = 0.625. Converting 0.625 into a fraction gives 625/1000 = 5/8, or five-eighths. Therefore option A is correct. Three-fourths equals 0.75, one-half equals 0.50, and eight-fifths equals 1.6, so those distractors do not match the deflator.

Correct answer: C. 150

Explanation: The deflator is (value at current prices ÷ value at base-year prices) × 100. Since the quantity is identical in both calculations, it cancels from the ratio. A current price 50% above the base price is 1.5 times the base price. Therefore, the deflator is 1.5 × 100 = 150. Option 100 would mean no price change, while 125 and 200 represent other price movements.

Correct answer: B. 80

Explanation: Assume the base-year price is 100. A fall of 20% reduces the current price to 80. Because the quantity is the same in both valuations, the quantity cancels out. The deflator is therefore (80 ÷ 100) × 100 = 80. Option 100 would indicate unchanged prices; 20 is only the percentage fall, and 120 indicates a 20% rise rather than a fall.

Correct answer: A. The current production-value weights of both goods

Explanation: The GDP deflator compares nominal GDP with real GDP and reflects the prices of all domestically produced final goods. When one price rises and another falls, the overall result depends on each good’s current production quantity and value weight. A heavily weighted good has greater influence. Thus, it cannot depend only on one price, one quantity, or population, making option A correct.

Correct answer: A. Because its current output quantity raises its weight

Explanation: The GDP deflator is based on the ratio of nominal GDP to real GDP, with current production quantities influencing the importance of goods in nominal output. If a high-priced good’s current output rises, its contribution to current production value and its effective weight can increase. It does not make the base price zero, exclude other goods, or turn the index into a one-good measure. Therefore A is correct.

Correct answer: A. A tendency to rise because of domestic price increases

Explanation: The GDP deflator measures the prices of domestically produced final goods and services included in GDP. Imported consumer goods are not directly part of domestic GDP production, so their price fall does not directly lower this deflator. A 10% rise in domestic final-good prices therefore creates an upward tendency, although the exact movement depends on production weights and other domestic prices. Hence A is correct.

Correct answer: A. Its change depends on the relative strength of both effects

Explanation: Nominal GDP equals the price level multiplied by real output; equivalently, Nominal GDP = (GDP deflator ÷ 100) × Real GDP. A rising deflator pushes nominal GDP upward, while falling real GDP pushes it downward. Without the percentage changes, the net result cannot be determined. If the price rise is larger, nominal GDP may rise; if the output fall is larger, it may fall. Thus A is correct.

Correct answer: A. It may rise or fall

Explanation: Nominal GDP equals the GDP deflator index divided by 100, multiplied by real GDP. A falling deflator reduces nominal GDP, whereas rising real output increases it. These effects work in opposite directions, so the final change depends on their relative percentage sizes. For example, a small price fall with a large output rise can increase nominal GDP, while a large price fall can reduce it. Therefore option A is correct.

Correct answer: A. It remains unchanged

Explanation: The GDP deflator is (Nominal GDP ÷ Real GDP) × 100. Initially, it is (1400 ÷ 1000) × 100 = 140. In the later period, it is (1680 ÷ 1200) × 100 = 140. Although both nominal and real GDP rise by 20%, they rise proportionately, so their ratio and the deflator remain unchanged. Therefore option A is correct; the percentage-change options confuse GDP growth with price-level change.

Correct answer: C. 137.5

Explanation: The GDP deflator measures the price level of domestically produced final output and is calculated as nominal GDP divided by real GDP, multiplied by 100. Using the new figures: (1980 ÷ 1440) × 100 = 137.5. Therefore, option C is correct. Option A uses an incorrect base, while the other values do not result from the stated formula.

Correct answer: B. 14.58 percent

Explanation: Inflation is the percentage increase in the price index, not merely the difference between the two index values. The index rises by 137.5 − 120 = 17.5 points. Relative to the initial index, inflation equals (17.5 ÷ 120) × 100 = 14.583%, approximately 14.58%. Hence option B is correct; 17.5 is only the point change.

Correct answer: A. Their values may differ because their coverage differs

Explanation: The GDP deflator and CPI measure different baskets. The GDP deflator covers prices of final goods and services produced domestically, whereas CPI tracks a consumer basket, which may include imported items and uses different weights. Thus their values can differ in the same period. Option A is correct; CPI is not thereby wrong, imports are not necessarily included in the deflator, and their inflation rates need not always match.

Correct answer: A. GDP deflator

Explanation: The GDP deflator is the broadest suitable measure among these choices because it reflects the prices of final goods and services produced within the domestic economy. It is not restricted to one commodity, financial assets, or imported products. Therefore option A best serves a policymaker studying economy-wide price movements in domestic final output; the other measures have much narrower coverage.

Correct answer: C. 126

Explanation: The governing relationship is GDP deflator = (nominal GDP ÷ real GDP) × 100. Substituting the given values gives (₹2,268 ÷ ₹1,800) × 100 = 1.26 × 100 = 126. Therefore option C is correct. A value of 126 means the current-price value is 126% of the constant-price value; the other options do not satisfy the formula.