GDP Deflator

Correct answer: C. ₹3,300 crore

Explanation: Rearrange the deflator formula: nominal GDP = real GDP × (deflator ÷ 100). Using the data, nominal GDP = ₹2,400 × (137.5 ÷ 100) = ₹2,400 × 1.375 = ₹3,300 crore. Hence option C is correct. The other amounts result from using an incorrect deflator or failing to divide the index by 100.

Correct answer: C. ₹2,000 crore

Explanation: Since deflator = (nominal GDP ÷ real GDP) × 100, real GDP = nominal GDP ÷ (deflator ÷ 100). Therefore real GDP = ₹2,560 ÷ 1.28 = ₹2,000 crore. Option C is correct. Dividing by 128 without converting the index to 1.28 would give an incorrect scale, while the other options do not satisfy the deflator equation.

Correct answer: B. 10 percent

Explanation: Inflation is calculated as the percentage increase relative to the initial index. The deflator rises by 158.4 − 144 = 14.4 points. Dividing this change by the initial value gives (14.4 ÷ 144) × 100 = 10%. Therefore option B is correct. The value 14.4 is the index-point increase, not the inflation rate in percentage terms.

Correct answer: B. It will rise by about 33.3 percent

Explanation: The GDP deflator equals nominal GDP divided by real GDP, multiplied by 100. If nominal GDP is fixed and real GDP falls to 75% of its original value, the new deflator becomes 1/0.75 = 1.333 times the old deflator. Therefore it rises by about 33.3%, not 25%. A percentage fall in the denominator produces a larger percentage rise in the ratio when the numerator is unchanged.

Correct answer: B. 10 percent

Explanation: Nominal GDP equals real GDP multiplied by the price deflator. Therefore the real-GDP growth factor is the nominal-GDP factor divided by the deflator factor: 1.21 ÷ 1.10 = 1.10. Subtracting 1 gives 0.10, or 10% real growth. Option C simply subtracts 10 from 21, and option D adds the rates; both ignore the multiplicative relationship between price and quantity changes.

Correct answer: C. The current-output weights of both goods

Explanation: The GDP deflator is an index of prices for goods and services produced domestically, with each item weighted by its share in current production. Therefore, the 25% rise in A and 10% fall in B must be evaluated using the current-output weights of both goods. If A has the larger weight, the deflator may rise; if B dominates, it may fall. Population is irrelevant here.

Correct answer: B. It may rise through the higher price of the domestic final good

Explanation: Imported inputs are not directly counted as domestic final output in the GDP deflator. However, their higher cost can be passed on to consumers through a higher price for the domestically produced final good. Because that final good is part of domestic GDP, its price increase can raise the deflator, depending on its output weight and the overall movement of other domestic prices. The rise is possible, not certain in every case.

Correct answer: B. The GDP deflator may rise while CPI is less affected

Explanation: The governing distinction is coverage. The GDP deflator measures the prices of domestically produced final goods and services, so domestic investment goods can receive substantial weight in it. CPI measures a consumer basket, which may give little or no direct weight to investment goods. Therefore investment-price inflation can raise the deflator while leaving CPI comparatively less affected; equal movement is not necessary.

Correct answer: A. Current output may receive inappropriate price weights

Explanation: The governing issue is outdated weighting. A fixed-base deflator uses prices from the base year to value current quantities. If production has shifted toward new or previously unimportant goods, old prices may no longer represent their current economic importance. The index can then measure price change poorly, which is why statistical agencies periodically revise or rebase the series. The other options do not follow from an old base year.

Correct answer: A. Because real GDP is recalculated with new price weights

Explanation: The governing identity is GDP deflator = (nominal GDP ÷ real GDP) × 100. Rebasing changes the reference prices used to calculate real GDP, while nominal GDP remains valued at the actual prices of that year. If the revised real-GDP denominator changes, the ratio changes as well. Nothing in rebasing automatically halves nominal GDP, adds all imports, or changes the index merely because population changes.

Correct answer: A. It uses changing weights from adjacent years

Explanation: The governing concept is annually updated weighting. A chain price index links price changes across successive or nearby years, using weights that reflect the production or spending pattern of those periods. Because the weights are refreshed, the index is less dependent on a distant year whose goods and relative importance may no longer resemble the current economy. It does not freeze prices, restrict the basket to one good, or remove nominal GDP.

Correct answer: A. Estimate a comparable price or apply a quality adjustment

Explanation: The governing measurement problem is the absence of a direct historical price. A new good cannot simply be assigned a zero price, classified as an import, or given an arbitrary doubled quantity. Statistical measurement may use a comparable product, an imputed or estimated base price, or a hedonic quality adjustment that separates the value of improved characteristics from pure price change. Thus A is the valid method.

Correct answer: B. Inflation may be overstated and real growth understated

Explanation: The governing principle is that a measured price increase may contain both pure inflation and payment for better quality. If the full 15% rise is treated as inflation while the 20% quality improvement is ignored, the index can overstate the price component. The corresponding real output or quality-adjusted growth can be understated. The exact bias depends on measurement details, but B describes the plausible direction; the other options are unrelated or absolute claims.

Correct answer: A. It may fall as output weights shift

Explanation: The governing concept is the composition or weighting effect. The GDP deflator is a ratio of nominal to real GDP and reflects the prices of the current domestic output mix. If production shifts toward goods that are relatively cheaper, those goods receive greater current-output weight, which can reduce the average measured price level, even if individual prices do not all fall. The result is not guaranteed in every dataset, but A is the possible effect.

Correct answer: A. Because current-output weights change

Explanation: The governing concept is that the GDP deflator reflects the current composition of domestic output, not only isolated price movements. When production of an expensive good rises, its share in nominal and real GDP can change, altering the aggregate ratio even if that good's own price is constant. This is a composition or weighting effect. A price change is therefore not required, imports are not the necessary cause, and a base year does not disappear.

Correct answer: A. 4 percent rise

Explanation: The governing relationship is nominal GDP = real GDP × GDP deflator, when both are expressed as index relatives. After the changes, real GDP is 0.80 of its earlier value and the deflator is 1.30 times its earlier value. Thus nominal GDP becomes 0.80 × 1.30 = 1.04, or a 4 percent rise. Option B ignores compounding, while C and D use incorrect directions or magnitudes.

Correct answer: A. Their direct market price and output quantity are not clearly observed

Explanation: Deflation separates changes in the value of output into price and quantity components. Government services such as public administration or defence are generally not sold in competitive markets, so no directly observed market price exists; their output volume is also difficult to measure. They are nevertheless domestic production and are not always imported or costless. Hence A correctly identifies the measurement problem.

Correct answer: A. Real government output may be overstated

Explanation: For non-market government services, output is often estimated from input costs, including employee compensation. If wages rise but the quantity or quality of services does not increase, treating the higher expenditure as extra output confuses a price change with a volume change. Real government production may therefore be overstated. Nominal output need not fall, and the information says nothing about imports or zero inflation.

Correct answer: A. Consumer benefit and quality improvement

Explanation: The GDP deflator is constructed from market-valued domestic production, not from every change in usefulness or satisfaction. When a digital service is free, a sharp increase in usage or quality may create substantial consumer benefit without increasing its recorded market price or transaction value. Consequently, the deflator may miss part of the quality improvement and welfare gain. Import duties, population, and public debt are not the relevant omitted effect.

Correct answer: C. No definite conclusion can be drawn from the deflator alone

Explanation: The GDP deflator measures the price movement of domestically produced final goods and services; it is not a complete welfare index. Higher prices for pollution-causing output may raise measured nominal GDP and the deflator, but the associated environmental damage, health costs, distributional effects, and changes in real production require separate information. Therefore the deflator alone cannot establish that welfare either rose or fell. C is correct.

Correct answer: A. When their base years and output structures differ

Explanation: The GDP deflator is an index calculated as nominal GDP divided by real GDP, multiplied by 100. Its level is affected by the selected base year and by the composition of domestically produced goods and services. Therefore, different base years or output structures can make a direct cross-country comparison misleading. Currency differences alone do not create this problem because the deflator is an index.

Correct answer: A. 10 percent

Explanation: The inflation rate for a particular year is calculated using the change from the previous year's index. In the second year, the index rises from 121 to 133.1, an increase of 12.1 points. Therefore, inflation is (133.1 − 121)/121 × 100 = 10 percent. The first-year increase was 21 percent, but it must not be used for the second-year calculation.

Correct answer: C. 120

Explanation: The GDP deflator formula is (Nominal GDP ÷ Real GDP) × 100. Substituting the given values gives (₹1728 crore ÷ ₹1440 crore) × 100 = 1.2 × 100 = 120. Thus, the correct answer is C. A deflator of 120 indicates that the relevant GDP price level is 20 percent above the base-year level, not that nominal GDP is 120 crore.

Correct answer: D. ₹1800 crore

Explanation: Since GDP deflator = (Nominal GDP ÷ Real GDP) × 100, nominal GDP can be found as Real GDP × Deflator ÷ 100. Therefore, nominal GDP = ₹1250 crore × 144 ÷ 100 = ₹1800 crore. Option D is correct. The other options result from using an incorrect multiplier or treating 144 as 1.44 without applying the units consistently.

Correct answer: B. ₹1500 crore

Explanation: Using GDP deflator = (Nominal GDP ÷ Real GDP) × 100, rearrange to obtain Real GDP = Nominal GDP × 100 ÷ Deflator. Thus, real GDP = ₹1875 crore × 100 ÷ 125 = ₹1500 crore. Option B is correct. The deflator must be used as the denominator after the formula is rearranged; multiplying nominal GDP by 125 would move in the wrong direction.