GDP Deflator

Correct answer: A. The current average price level is 10% below the base-year level.

Explanation: The GDP deflator is calculated as (Nominal GDP ÷ Real GDP) × 100, with the base-year price index normally equal to 100. A deflator of 90 means that the current-year average price level is 90% of the base-year level, or 10% lower. It says nothing directly about output growth or a 90% inflation rate. Hence option A is correct.

Correct answer: A. Prices of domestic final goods rise while quantities remain unchanged

Explanation: The GDP deflator equals nominal GDP divided by real GDP, multiplied by 100. If prices of domestically produced final goods rise while their quantities remain unchanged, nominal GDP increases but valuation at base-year prices does not. Thus the deflator rises and real GDP stays unchanged. Option B changes real output, while C and D do not directly determine this price index.

Correct answer: C. ₹440 crore

Explanation: Use the GDP-deflator relationship: GDP deflator = (nominal GDP ÷ real GDP) × 100. Rearranging gives nominal GDP = (deflator × real GDP) ÷ 100 = (110 × ₹400 crore) ÷ 100 = ₹440 crore. Hence option C is correct. Option B incorrectly treats real and nominal GDP as identical, while the other values do not follow from the formula.

Correct answer: C. No direct effect because imports are not part of domestic GDP

Explanation: The GDP deflator is based on the prices of final goods and services produced domestically. An imported machine is not part of domestic production, even though it may be used by a domestic firm. If only its import price rises and domestic output prices and quantities are unchanged, the deflator has no direct change. Thus option C is correct; the other options assert unsupported movements.

Correct answer: A. Average domestic price level fell and real output rose

Explanation: The GDP deflator equals nominal GDP divided by real GDP, multiplied by 100, and measures the overall price level of domestically produced final goods. A fall from 125 to 120 indicates that this average price index declined, while the separate statement that real GDP rose indicates higher real output. Nominal GDP cannot be determined without both rates of change.

Correct answer: C. 160

Explanation: The GDP deflator is calculated as (nominal GDP ÷ real GDP) × 100. For 200 units, nominal value is 200 × ₹8 = ₹1,600, while real value at the base-year price is 200 × ₹5 = ₹1,000. Thus, deflator = (1,600 ÷ 1,000) × 100 = 160. The quantity cancels because it appears in both values.

Correct answer: C. 120

Explanation: Nominal GDP is 20 percent above ₹250 crore, so it equals 250 × 1.20 = ₹300 crore. Applying the GDP-deflator formula, deflator = (nominal GDP ÷ real GDP) × 100 = (300 ÷ 250) × 100 = 120. Option 100 would mean equal nominal and real GDP, while 80 and 125 do not follow from the stated 20 percent increase.

Correct answer: D. ₹900 crore

Explanation: The GDP deflator formula is: GDP deflator = (Nominal GDP ÷ Real GDP) × 100. Rearranging gives Nominal GDP = Real GDP × Deflator ÷ 100. Substituting the values, nominal GDP = ₹720 crore × 125 ÷ 100 = ₹900 crore. Option A would incorrectly divide by the deflator, while option B ignores the price adjustment and option C uses an incorrect multiplier.

Correct answer: B. ₹700 crore

Explanation: The deflator is calculated as (Nominal GDP ÷ Real GDP) × 100. Rearranging the formula gives Real GDP = Nominal GDP × 100 ÷ Deflator. Therefore, Real GDP = ₹840 crore × 100 ÷ 120 = ₹700 crore. Option C results from an incomplete adjustment, option A uses an excessive price correction, and option D multiplies instead of dividing by the deflator.

Correct answer: B. The price level fell by about 4 percent

Explanation: The GDP deflator is an index of the price level. Its index-point fall is 120 − 125 = −5, but the percentage change must be calculated relative to the original value: (−5 ÷ 125) × 100 = −4%. Thus the price level fell by approximately 4%, making option B correct. A confuses index points with percentage change, while C and D cannot be inferred from the deflator alone.

Correct answer: C. 20 percent

Explanation: The GDP deflator is calculated as nominal GDP divided by real GDP, multiplied by 100. Thus, deflator = (1,500 ÷ 1,250) × 100 = 120. Since the base-year index is 100, the average price level is 120 − 100 = 20 percent above the base year. Therefore, option C is correct; the other percentages do not follow from the ratio.

Correct answer: B. Nominal GDP is 80 percent of real GDP

Explanation: The GDP deflator is defined as (nominal GDP ÷ real GDP) × 100. A deflator of 80 therefore means nominal GDP ÷ real GDP = 0.80, so nominal GDP is 80 percent of real GDP at the stated valuation. It does not mean real GDP is 80 percent of nominal GDP, nor does it imply that nominal GDP is 20 percent higher.

Correct answer: C. 15 percent

Explanation: The same current output is valued at ₹2,000 crore using base-year prices and ₹2,300 crore using current prices. The implicit price index is therefore (2,300 ÷ 2,000) × 100 = 115. Since the base-year index is 100, the price level has increased by 115 − 100 = 15 percent. The difference between the two valuations reflects prices, not a change in the quantity of output.

Correct answer: D. ₹1,200 crore

Explanation: The GDP-deflator formula is: Deflator = (Nominal GDP ÷ Real GDP) × 100. Rearranging gives Real GDP = (Nominal GDP ÷ Deflator) × 100. Substitution yields (₹960 ÷ 80) × 100 = ₹1,200 crore, so option D is correct. Because the deflator is below 100, the base-price real value can be higher than the current-price nominal value in this calculation.

Correct answer: B. Because it is derived implicitly from the ratio of nominal to real GDP

Explanation: The GDP deflator is called implicit because it is not constructed directly from a separately selected basket of goods. It is inferred from the relationship Deflator = (Nominal GDP ÷ Real GDP) × 100, and its weights reflect the goods and services produced in the economy. Therefore option B is correct. It does have a base-year interpretation, is not based only on surveys, and does not measure imports alone.

Correct answer: B. It is 50 percent higher

Explanation: The deflator index is 100 in the base year. A value of 150 means that the current price level is 150/100 times the base-year level, or 1.5 times as high. Therefore, prices are 50 percent higher than in the base year, not 150 percent higher or 150 times higher. Option B is correct.

Correct answer: C. 120

Explanation: The GDP deflator index is calculated by the formula: nominal GDP index divided by real GDP index, multiplied by 100. Substituting the given values gives (150 ÷ 125) × 100 = 1.2 × 100 = 120. Therefore, the deflator index is 120, meaning that the relevant price level is 20 percent above the base-year level. Option C is correct; the other numbers do not follow the formula.

Correct answer: C. 120

Explanation: The GDP deflator measures the price level of domestically produced final output relative to the base year. Its formula is nominal GDP divided by real GDP, multiplied by 100. Here, the calculation is (900 ÷ 750) × 100 = 1.2 × 100 = 120. Hence, option C is correct. Values such as 110, 115, or 125 would result from an incorrect ratio or calculation and do not represent the given data.

Correct answer: A. Current average price level is 35 percent above the base year

Explanation: The GDP deflator is calculated as (Nominal GDP ÷ Real GDP) × 100 and measures the overall price level of domestically produced final goods relative to the base year. A deflator of 135 means the current price level is 135% of the base-year level, so prices are 35% higher. It does not directly measure real output, population, or a fall in GDP.

Correct answer: C. 20 percent

Explanation: Use the GDP-deflator formula: GDP deflator = (Nominal GDP ÷ Real GDP) × 100. Substitution gives (₹1260 crore ÷ ₹1050 crore) × 100 = 1.2 × 100 = 120. Since the base-year index is 100, an index of 120 means that the current price level is 20% above the base-year level. Therefore, option C is correct.

Correct answer: B. Negative 5 percent

Explanation: The deflator-based inflation rate is calculated as [(New deflator − Old deflator) ÷ Old deflator] × 100. Here it is [(152 − 160) ÷ 160] × 100 = (−8 ÷ 160) × 100 = −5%. The negative sign indicates that the general price level fell, which is deflation. Therefore option B is correct; 8 is the index-point change, not the percentage rate.

Correct answer: A. 90

Explanation: The GDP deflator is calculated as (Nominal GDP ÷ Real GDP) × 100. If nominal GDP equals 90% of real GDP, the ratio is 0.90. Therefore, the deflator is 0.90 × 100 = 90. Option A is correct. A value of 100 would indicate equal nominal and real GDP, whereas values above 100 would indicate that the current price level exceeds the base-year level.

Correct answer: A. Because it is not part of domestic production

Explanation: The GDP deflator measures the price level of final goods and services produced within the domestic economy. An imported consumer good may be final and may affect consumer prices, but its production occurred abroad, so it is excluded from domestic GDP and its deflator. Therefore A is correct. B is false because many consumer goods are final goods, while C and D are factually incorrect.

Correct answer: C. 120

Explanation: For one good, the GDP deflator can be calculated as current-price value divided by base-price value, multiplied by 100. Current nominal value is 100 × ₹12 = ₹1200, and the comparable real value is 100 × ₹10 = ₹1000. Thus the deflator is (1200 ÷ 1000) × 100 = 120. Quantity cancels out, so C is correct.

Correct answer: A. ₹400 crore

Explanation: The GDP-deflator formula is GDP deflator = (nominal GDP ÷ real GDP) × 100. Rearranging gives nominal GDP = (deflator × real GDP) ÷ 100. Substituting the values gives (80 × ₹500 crore) ÷ 100 = ₹400 crore. Therefore option A is correct. The value ₹625 crore would result from incorrectly dividing real GDP by 0.8 without applying the formula in the stated form.