GDP Deflator

Correct answer: B. It will fall

Explanation: The GDP deflator is calculated as (Nominal GDP ÷ Real GDP) × 100. When nominal GDP, the numerator, remains unchanged while rebasing increases measured real GDP, the denominator becomes larger. The ratio therefore decreases, assuming the figures are being compared on the same stated basis. Hence option B is correct. It does not become negative, and it need not remain unchanged.

Correct answer: A. The effective price increase may be understated

Explanation: The governing concept is quality adjustment in price measurement. If a subscription costs the same but provides fewer or poorer features, the consumer receives less real service for that price. Treating the unchanged posted price as fully comparable can hide the effective price increase per unit of quality, so measured inflation or the GDP deflator may understate the true price rise. The other choices make unsupported absolute claims.

Correct answer: A. It may push it downward

Explanation: The relevant idea is the composition or weighting effect in the GDP deflator. The deflator compares nominal GDP with real GDP, and the current output mix determines the weights attached to prices. If production shifts away from a relatively expensive good toward a cheaper one, the weighted price measure can decline, even when individual prices have not all fallen. Therefore, “may push it downward” is correct; the other options use unjustified certainty.

Correct answer: A. It will equal that common proportion

Explanation: The governing principle is proportional price change in a weighted index. Suppose every relevant price is multiplied by the same factor, such as 1.10. Both the nominal-value calculation and the corresponding price component are then multiplied proportionally, so changing the output weights cannot alter that common rate. The deflator therefore rises by the same proportion. Output growth is a quantity concept, while zero or negative growth is not implied.

Correct answer: A. 20 percent rise

Explanation: Successive percentage changes apply to different bases, so they must be compounded rather than added. Take the initial deflator as 100. After a 60% rise it becomes 160; a 25% fall leaves 160 × 0.75 = 120. The final value is therefore 20% above 100. Adding 60 and −25 incorrectly gives 35%, and the other alternatives ignore the changing base.

Correct answer: B. 10 percent fall

Explanation: Use multiplicative factors for successive changes. Starting from 100, a 40% fall gives 100 × 0.60 = 60. The following 50% rise is calculated on 60, giving 60 × 1.50 = 90. Compared with the initial 100, the final deflator is 10% lower. Therefore option B is correct; simply subtracting 50 from 40 or assuming reversal would wrongly produce other answers.

Correct answer: B. 19.4 percent

Explanation: Because each 3% increase is applied to the previous year’s level, the changes compound. The total factor is \((1.03)^6\), so the cumulative increase is \([(1.03)^6 − 1] × 100\). Since \((1.03)^6\) is approximately 1.194, the total increase is about 19.4%. Option A simply multiplies 3 by 6 and ignores compounding; the other values do not follow the formula.

Correct answer: C. 12 percent

Explanation: The GDP deflator is calculated as (Nominal GDP ÷ Real GDP) × 100. In year one it is (3000 ÷ 2400) × 100 = 125, while in year two it is (3696 ÷ 2640) × 100 = 140. Its growth rate is [(140 − 125) ÷ 125] × 100 = 12%. Hence option C is correct; 23.2% is not the deflator growth rate.

Correct answer: A. 4 percent rise

Explanation: Nominal GDP equals real GDP multiplied by the price deflator, with the same base convention. After a 35% fall, real GDP is 0.65 of its original level; after a 60% rise, the deflator is 1.60 times its original level. The nominal-GDP ratio is 0.65 × 1.60 = 1.04, so nominal GDP rises by 4%. Option A is correct.

Correct answer: B. 26.7 percent rise

Explanation: Real GDP is obtained by dividing nominal GDP by the GDP deflator. After the changes, nominal GDP becomes 76% of its original value and the deflator becomes 60%. Therefore, the real-GDP ratio is 0.76 ÷ 0.60 = 1.2667, which means an increase of approximately 26.7%. Option B is correct; directly subtracting 40% from 24% is not valid.

Correct answer: A. Real quality growth may be understated

Explanation: Government services are often valued in national accounts using their production cost because they have no clear market price. If learning outcomes improve while the recorded cost and measured quantity remain unchanged, the statistics may fail to capture the quality improvement. Thus real output and welfare gains can be understated, making option A correct. The other choices do not follow from cost-based measurement.

Correct answer: A. Growth in quality and consumer benefit

Explanation: A GDP deflator is based on recorded nominal values and real quantities, while a free service has a market price of zero. If its accuracy, convenience, or usefulness improves, that quality gain may not raise measured prices or market transactions. Consequently, the deflator may fail to capture the full increase in quality and consumer benefit. Option A is correct; the other choices are unrelated macroeconomic variables.

Correct answer: B. The second country

Explanation: Inflation is measured by the percentage change in the index, not by the absolute point increase alone. For the first country, the rate is (189 − 180) / 180 × 100 = 5%. For the second country, it is (132 − 120) / 120 × 100 = 10%. Although the first index rises by 9 points and the second by 12 points, the second country has the larger proportional increase. Option B is correct.

Correct answer: B. 10 percent fall

Explanation: Use the identity Real GDP = Nominal GDP / (GDP deflator / 100). The deflator rises from 150 to 180, so the price-level factor is 180/150 = 1.20. Nominal GDP has a factor of 1.08. Hence the real-GDP factor is 1.08/1.20 = 0.90, meaning real GDP becomes 90% of its original value and falls by 10%. Therefore, option B is correct.

Correct answer: C. 41.6 percent

Explanation: For cumulative changes, divide the nominal-GDP growth factor by the deflator growth factor. Nominal GDP changes from 1 to 2.0736, while the deflator changes from 1 to 1.4641. Thus the real-GDP factor is 2.0736 / 1.4641 ≈ 1.416. Subtracting 1 and multiplying by 100 gives approximately 41.6% total real growth. Therefore, option C is correct; simply subtracting the two rates would be incorrect.

Correct answer: A. 5 percent

Explanation: The inflation rate for a particular year compares the current deflator with the immediately preceding year’s deflator. For the third year, the change is 129.36 − 123.2 = 6.16. Dividing by the previous value gives 6.16 / 123.2 × 100 = 5%. The earlier movement from 112 to 123.2 was 10%, but it is not the third-year rate. Hence option A is correct.