GDP Deflator

Correct answer: B. 10 percent

Explanation: The governing concept is percentage change in a price index. The fall in the deflator is 160 − 144 = 16 points. To express this fall as a percentage, divide by the initial value: (16 ÷ 160) × 100 = 10%. Therefore, option B is correct. The 16-point difference is not a 16% fall, because percentage change must use the original index as the denominator.

Correct answer: B. Inflation

Explanation: The GDP deflator measures the average price level of domestically produced final goods and services relative to the base year. If it rises continuously, the average price level is increasing over time, which generally indicates inflation. Therefore, option B is correct. Deflation would normally be associated with a falling deflator, while population decline or zero production is not implied by this price index.

Correct answer: B. Deflation

Explanation: The GDP deflator measures the average price level of domestically produced final goods and services, using the relation Nominal GDP divided by Real GDP, multiplied by 100. If it continuously falls, prices are generally declining relative to the base year, indicating deflation. Inflation would normally make the deflator rise, while population growth and exports do not define this movement.

Correct answer: C. It will remain unchanged

Explanation: The GDP deflator is calculated as Nominal GDP divided by Real GDP, multiplied by 100. When prices remain unchanged, nominal GDP and real GDP increase because of the same rise in physical output and therefore move proportionately. Their ratio remains constant, so the deflator remains unchanged. It does not become zero, and a change in output alone does not imply inflation or deflation.

Correct answer: A. It will rise

Explanation: The GDP deflator captures changes in the price level by comparing nominal GDP with real GDP. If physical output remains unchanged but prices rise, nominal GDP increases while real GDP, measured at base-year prices, stays constant. Consequently, the ratio Nominal GDP divided by Real GDP rises, so the deflator increases. Option C would apply only under a particular base-year price situation, not generally.

Correct answer: B. It will fall

Explanation: The GDP deflator is an index of the prices of domestically produced final output. With output unchanged, real GDP remains constant because it is valued at base-year prices. A fall in current prices lowers nominal GDP, so the ratio Nominal GDP divided by Real GDP declines. Therefore the deflator falls. It would not remain unchanged because the price level has changed.

Correct answer: C. It remains unchanged

Explanation: The GDP deflator equals (Nominal GDP divided by Real GDP) multiplied by 100. Suppose the initial values are N and R; the new values are 1.10N and 1.10R. The new ratio is 1.10N divided by 1.10R, which equals N divided by R. Since both measures rise at the same rate, the deflator remains unchanged rather than rising by 10 or 20 percent.

Correct answer: A. It will rise

Explanation: The GDP deflator is calculated as (Nominal GDP divided by Real GDP) multiplied by 100. If real GDP remains constant and nominal GDP increases, the numerator of this ratio becomes larger while the denominator is unchanged. Therefore the deflator rises, indicating a higher average price level for domestic final output. It need not become exactly 100; that value depends on the base-year relationship.

Correct answer: B. It will fall

Explanation: The GDP deflator is obtained by dividing nominal GDP by real GDP and multiplying by 100. When real GDP remains unchanged, a fall in nominal GDP reduces this ratio directly. Thus the deflator falls, showing a decline in the average prices of domestically produced final goods and services relative to the base year. It cannot remain unchanged or double when only the numerator decreases.

Correct answer: A. Price change of domestic final goods and services

Explanation: The GDP deflator measures the price change of all domestically produced final goods and services included in GDP. It is broad and uses the current composition of domestic production, rather than focusing only on a raw material, gold, or imports. Imported goods are excluded from domestic GDP, while intermediate goods are excluded to avoid double counting. Therefore option A is correct.

Correct answer: A. Current domestic production

Explanation: Unlike the CPI, which usually tracks a specified consumer basket, the GDP deflator is based on the prices of final goods and services currently produced within the domestic economy. Its weights change as the composition of domestic output changes. It excludes imports because they are not domestic production. Therefore current domestic production, option A, is the correct basis.

Correct answer: B. Because imports are not domestic production

Explanation: The GDP deflator covers the prices of final goods and services produced within the domestic economy. An imported car may be a final consumer good, but it is not produced domestically, so its price is not part of domestic GDP and does not directly enter the GDP deflator. This differs from the CPI, which may include imported consumer goods in its basket.

Correct answer: A. GDP deflator

Explanation: The GDP deflator measures the overall price level of domestically produced final goods and services relative to the base year. A newly produced domestic bus is included in domestic output, so a rise in its price can raise the deflator, provided other factors remain unchanged. Population, unemployment and exchange-rate measures are not directly determined by the bus price alone.

Correct answer: B. 20 percent

Explanation: The GDP deflator is calculated as (Nominal GDP ÷ Real GDP) × 100. Thus, it is (₹1200 crore ÷ ₹1000 crore) × 100 = 120. Since 100 represents the base-year price level, an index of 120 means prices are 20 percent higher than in the base year. Therefore, option B is correct; 25 percent incorrectly uses the wrong base.

Correct answer: B. ₹950 crore

Explanation: The relationship is GDP deflator = (Nominal GDP ÷ Real GDP) × 100. Rearranging gives Nominal GDP = (Deflator × Real GDP) ÷ 100. Therefore, nominal GDP = (95 × ₹1000 crore) ÷ 100 = ₹950 crore. The deflator below 100 also indicates that the measured price level is below the base-year level, so option B is consistent.

Correct answer: C. ₹900 crore

Explanation: Use the formula GDP deflator = (Nominal GDP ÷ Real GDP) × 100. Solving for real GDP gives Real GDP = (Nominal GDP × 100) ÷ Deflator. Substitution gives (₹990 crore × 100) ÷ 110 = ₹900 crore. Therefore, option C is correct. The other values result from using an incorrect divisor or making an arithmetic error.

Correct answer: B. 10 percent

Explanation: Inflation is the percentage change in the price index, calculated using the initial value as the denominator. Here, inflation = [(121 − 110) ÷ 110] × 100 = (11 ÷ 110) × 100 = 10 percent. Thus, option B is correct. The increase of 11 index points is not itself an 11 percent inflation rate, while 21 percent ignores the proper percentage-change formula.

Correct answer: A. 20 percent

Explanation: The percentage fall is measured relative to the original value, not the final value. Therefore, fall = [(125 − 100) ÷ 125] × 100 = (25 ÷ 125) × 100 = 20 percent. Option A is correct. Dividing by 100 would incorrectly produce 25 percent, and the change is neither 30 percent nor a complete 100 percent fall.

Correct answer: A. When nominal GDP equals real GDP

Explanation: The GDP deflator equals (Nominal GDP ÷ Real GDP) × 100. If nominal GDP and real GDP are equal, their ratio is 1, so the deflator equals 1 × 100 = 100. This means the current price level is the same as the base-year price level. The other conditions do not establish equality between nominal and real GDP, so they cannot guarantee a deflator of 100.

Correct answer: C. It indicates a rise in the price level only

Explanation: The GDP deflator is a price index for domestically produced final output. A rise in it indicates that the relevant average price level has increased, but it does not by itself reveal whether the quantity of real output rose, fell or remained unchanged. That requires separate real-GDP information. Therefore, option C is the only conclusion that follows with certainty; the other options make unsupported claims about output.

Correct answer: A. The average domestic price level has fallen

Explanation: A GDP deflator measures the average price level of final goods and services produced domestically. Therefore, a fall in the deflator most appropriately indicates a fall in that average domestic price level, often described as deflation in the measured output basket. It does not prove that real output doubled, population declined or imports increased, because none of those variables is determined by the deflator alone.

Correct answer: B. Previous-year deflator

Explanation: Inflation is the percentage change in the price index from one period to the next. The standard formula is [(current-year deflator − previous-year deflator) ÷ previous-year deflator] × 100. The previous-year value is the initial reference level, so it belongs in the denominator. Using the new-year deflator would measure the change against the wrong base, while population and nominal GDP are not the required denominator.

Correct answer: A. Percentage change in the price level

Explanation: The GDP deflator is a broad price index for domestically produced final goods and services. Comparing consecutive values measures the percentage change in the overall price level: [(current deflator − previous deflator) ÷ previous deflator] × 100. A rise indicates inflation and a fall indicates deflation. Population, unemployment, and government debt cannot be calculated from deflator values alone, so option A is correct.

Correct answer: C. 120

Explanation: The GDP deflator converts nominal GDP into an index relative to the base-year price level. Use: GDP deflator = (Nominal GDP ÷ Real GDP) × 100. Substituting the given values gives (₹1,260 crore ÷ ₹1,050 crore) × 100 = 1.2 × 100 = 120. Therefore, option C is correct. The other values result from using an incorrect ratio or calculation.

Correct answer: C. ₹1260 crore

Explanation: The relationship among the aggregates is: GDP deflator = (Nominal GDP ÷ Real GDP) × 100. Rearranging gives Nominal GDP = Real GDP × GDP deflator ÷ 100. Thus, nominal GDP = ₹1,200 crore × 105 ÷ 100 = ₹1,260 crore. The deflator of 105 means the relevant price level is 5% above the base-year level, so option C is correct.