GDP Deflator

Correct answer: C. 10 percent

Explanation: Inflation measured through the deflator is calculated as the percentage change in the index: [(new deflator − old deflator) ÷ old deflator] × 100. Thus, [(137.5 − 125) ÷ 125] × 100 = (12.5 ÷ 125) × 100 = 10%. Hence option C is correct. The other percentages do not use the initial deflator as the proper base.

Correct answer: C. It will rise by 15 percent

Explanation: The GDP deflator equals Nominal GDP divided by Real GDP, multiplied by 100. When real GDP is unchanged, a 15% rise in nominal GDP cannot come from higher output; it reflects a 15% rise in the price level. Therefore, the deflator also rises by 15%, making option C correct. It does not remain unchanged or double the percentage increase.

Correct answer: C. ₹1,440 crore

Explanation: Use the GDP deflator identity: Nominal GDP = Real GDP × (Deflator ÷ 100). Therefore, Nominal GDP = ₹900 × (160 ÷ 100) = ₹900 × 1.6 = ₹1,440 crore. Thus option C is correct. A deflator of 160 indicates that the nominal value is 160% of the real value; the other options do not apply this relationship correctly.

Correct answer: C. 120

Explanation: The GDP deflator measures the price level implicit in GDP and is calculated as (Nominal GDP ÷ Real GDP) × 100. Here, (₹1,260 crore ÷ ₹1,050 crore) × 100 = 1.2 × 100 = 120. Therefore, option C is correct. Keeping nominal GDP in the numerator is essential; reversing the terms would produce an incorrect index below 100.

Correct answer: C. ₹1,800 crore

Explanation: Since the GDP deflator equals (Nominal GDP ÷ Real GDP) × 100, nominal GDP can be found by multiplying real GDP by the deflator and dividing by 100. Therefore, Nominal GDP = ₹1,600 crore × 112.5 ÷ 100 = ₹1,600 × 1.125 = ₹1,800 crore. Option C is correct; the other amounts do not apply the 112.5 index correctly.

Correct answer: A. The current price level is above the base year

Explanation: The GDP deflator is an index in which the base year is assigned a value of 100. A value above 100 means that the average prices of domestically produced final goods and services are higher than their base-year level. It does not by itself measure real output, population, or demographic change. Therefore, option A is the correct interpretation.

Correct answer: A. Average current prices are below base-year prices

Explanation: Because the base-year GDP deflator is set equal to 100, a value below 100 indicates that the current average price level of domestically produced final goods and services is lower than the base-year level. It does not prove that real GDP has fallen, that nominal GDP is zero, or that inflation was negative in every period. Hence option A is correct.

Correct answer: B. 8 percent

Explanation: The inflation rate is the percentage change in the deflator relative to its initial value. First find the increase: 116.64 − 108 = 8.64. Then calculate (8.64 ÷ 108) × 100 = 0.08 × 100 = 8%. Therefore, option B is correct. The value 8.64% confuses the index-point increase with the percentage increase.

Correct answer: B. 10% fall

Explanation: The GDP deflator measures the price level relative to the base year. The percentage change is calculated as [(new deflator − old deflator) ÷ old deflator] × 100 = [(118.8 − 132) ÷ 132] × 100 = −10%. The negative sign means a fall, so option B is correct. Options A, C and D use incorrect percentage bases or calculations.

Correct answer: C. It will remain unchanged

Explanation: The GDP deflator is defined as (nominal GDP ÷ real GDP) × 100. If nominal GDP and real GDP both increase by the same factor, 1.12, the new ratio is (1.12N ÷ 1.12R) × 100 = (N ÷ R) × 100. Thus the deflator and the measured price level remain unchanged. Therefore option C is correct; the other choices incorrectly add or subtract the growth rates.

Correct answer: B. About 9.1%

Explanation: Because the GDP deflator equals nominal GDP divided by real GDP, its growth factor is 1.20 ÷ 1.10 = 1.0909. Therefore the deflator rises by (1.0909 − 1) × 100 ≈ 9.1%. Option B is correct. Simply subtracting 10% from 20% gives 10%, but that ignores the ratio structure and is only a rough approximation.

Correct answer: A. About 2.8% fall

Explanation: The price level is represented by the GDP deflator, which is proportional to nominal GDP divided by real GDP. Its change factor is 1.05 ÷ 1.08 = 0.9722. Thus the price level changes by (0.9722 − 1) × 100 ≈ −2.8%, indicating a fall. Hence option A is correct; the other choices ignore the ratio or its negative sign.

Correct answer: A. Domestic investment goods and government services

Explanation: The GDP deflator covers the prices of all final goods and services produced domestically, not just household consumption. Its coverage can therefore include domestically produced investment goods and final government services, along with consumption goods. Option A is correct. Imports are excluded from domestic GDP, used goods are not current production, and transfer payments are not payments for current output.

Correct answer: C. An imported finished laptop

Explanation: The GDP deflator measures prices of final goods and services produced within the domestic economy. A newly made domestic car, a domestic medical service, and a domestically produced machine all represent current domestic output. An imported finished laptop is produced abroad, so it is not directly part of domestic GDP or its deflator. Hence option C is correct.

Correct answer: A. It can change with current domestic output

Explanation: The GDP deflator is a broad price index for goods and services currently produced domestically. Its weights and effective basket can change as the composition of domestic output changes. CPI, in contrast, generally tracks a selected basket purchased by consumers and is designed to reflect household living costs. Therefore option A is correct; the other choices misstate the coverage of both indexes.

Correct answer: A. Because capital goods are part of domestic final output

Explanation: The GDP deflator is nominal GDP divided by real GDP, multiplied by 100, and it reflects prices of domestically produced final goods and services. Domestically produced capital goods are final investment goods, so a rise in their prices can raise nominal GDP relative to real GDP. Option A is correct; B is false because capital goods need not be imported, while C and D wrongly describe the deflator and real GDP.

Correct answer: A. Because imports are not domestic production

Explanation: The GDP deflator covers prices of final goods and services produced within the domestic economy. Imported fuel is excluded from domestic GDP directly, so its own price increase has a limited direct effect on the deflator. It may still raise domestic transport or production costs indirectly. Therefore A is correct; B, C and D give incorrect reasons.

Correct answer: A. Current production structure may receive unsuitable weights

Explanation: A deflator compares nominal GDP with real GDP based on a price structure. If the base year is very old, consumer and production patterns, technology, and the relative importance of goods may have changed. Old weights can therefore distort measured price change. Option A is correct; an old base year does not eliminate nominal GDP, make prices zero, or convert imports into domestic output.

Correct answer: C. ₹1,260 crore

Explanation: Use the identity: GDP deflator = (nominal GDP / real GDP) × 100. Rearranging gives nominal GDP = real GDP × deflator / 100. Substitution gives ₹900 crore × 140/100 = ₹1,260 crore. Thus option C is correct. The other values result from incorrect multiplication or from failing to apply the index factor of 100.

Correct answer: C. ₹1,500 crore

Explanation: The GDP-deflator identity is deflator = (nominal GDP / real GDP) × 100. Therefore real GDP = nominal GDP × 100 / deflator. Substituting the figures gives ₹2,025 crore × 100 / 135 = ₹1,500 crore. Option C is correct because it removes the price effect from nominal GDP. The other options do not satisfy the stated formula.

Correct answer: B. 80

Explanation: Apply the GDP-deflator formula: deflator = (nominal GDP / real GDP) × 100. Using the given values, deflator = (₹1,000 crore / ₹1,250 crore) × 100 = 0.8 × 100 = 80. Hence option B is correct. The value 80 indicates that the measured price level is 20% below the base-year level; 75, 100 and 125 do not follow from the calculation.

Correct answer: B. 10 percent

Explanation: The governing concept is that inflation measured by a deflator is the percentage change relative to the initial deflator. Calculate [(137.5 − 125) / 125] × 100 = (12.5 / 125) × 100 = 10%. Therefore option B is correct. Option A is too low, while 12.5 is only the index-point increase, not the percentage rate; option D is an overestimate.

Correct answer: B. 5 percent

Explanation: Inflation is found by measuring the deflator’s change against its starting value, not against 100. The calculation is [(100.8 − 96) / 96] × 100 = (4.8 / 96) × 100 = 5%. Thus option B is correct. Option A confuses the absolute index-point change with the rate, while 8% and 10% do not follow from the percentage-change formula.

Correct answer: B. 10 percent

Explanation: Deflation is the percentage fall in the general price level. Using the initial deflator as the base, the change is (162 − 180) / 180 × 100 = −18/180 × 100 = −10%. The negative sign indicates a fall, so the deflation rate is 10%. Option B is correct; 18 is only the index-point decline, not its percentage.

Correct answer: B. It will fall by 15 percent

Explanation: The GDP deflator reflects the price level of domestically produced final goods, while real output quantities are held constant in this question. Therefore a 15% fall in those prices produces a 15% fall in the deflator. Option B is correct. Constant quantities do not prevent a price-based change; option C would be valid only if prices also remained constant.