Real GDP and Nominal GDP

Correct answer: B. 12 percent

Explanation: Because nominal GDP equals real GDP multiplied by the price level, the real GDP factor is 1.40 ÷ 1.25 = 1.12. Thus real GDP growth is (1.12 − 1) × 100 = 12 percent. Option B is correct. Subtracting 25 from 40 gives 15 percent, but that is only an approximation and not the exact rate.

Correct answer: A. Real GDP rises but the nominal effect remains uncertain

Explanation: Real GDP uses fixed prices, so an increase in the quantity produced raises real GDP, assuming the good is included in measured output. Nominal GDP equals price multiplied by quantity; the higher quantity pushes it upward while the lower price pushes it downward. The net nominal effect depends on their relative sizes, so option A is correct.

Correct answer: C. 16.67 percent

Explanation: The governing relationship is nominal GDP = real GDP × price index. Therefore, the real-GDP factor is 1.12 ÷ 0.96 = 1.1667. Subtracting 1 and multiplying by 100 gives an exact growth of approximately 16.67%. Option A merely subtracts the rates and ignores the fall in prices; option D uses an incorrect additive adjustment, while B confuses nominal and real growth.

Correct answer: B. Country B

Explanation: Real GDP is calculated as nominal GDP ÷ GDP deflator × 100. For Country A, real GDP = 2500 ÷ 125 × 100 = ₹2,000 crore. For Country B, it is 2400 ÷ 100 × 100 = ₹2,400 crore. Hence Country B has the higher real GDP. Comparing nominal values alone would be misleading because the price indexes differ.

Correct answer: A. 0.1 percent rise

Explanation: Nominal GDP combines the quantity and price effects multiplicatively. A 9% fall in real GDP gives a factor of 0.91, while a 10% price rise gives 1.10. Their product is 0.91 × 1.10 = 1.001, so nominal GDP rises by (1.001 − 1) × 100 = 0.1%. Directly adding or subtracting rates would not be exact.

Correct answer: B. About 8.3 percent

Explanation: Because nominal GDP = real GDP × price level, the price-level factor equals 1.30 ÷ 1.20 = 1.08333. Thus the price level rises by (1.08333 − 1) × 100 ≈ 8.3%. Simply subtracting 20 from 30 gives 10%, which is only a rough shortcut and not the exact multiplicative result. Therefore B is best.

Correct answer: A. 2.5 percent rise

Explanation: Nominal GDP reflects both real output and the price level. The real-output factor after an 18% fall is 0.82, and the deflator factor after a 25% rise is 1.25. Their product is 0.82 × 1.25 = 1.025, meaning nominal GDP becomes 102.5% of its original value. Hence it rises by 2.5%, not by the simple difference of 7 percentage points.

Correct answer: A. 5 percent rise

Explanation: Nominal GDP changes according to the product of the quantity and price factors, not by simply adding their percentage changes. The quantity factor is 1.40 and the price factor is 0.75. Thus the nominal GDP factor is 1.40 × 0.75 = 1.05, meaning a 5% increase. Therefore option A is correct. C incorrectly subtracts 25 from 40, and D adds the rates without considering the price decline.

Correct answer: C. It may rise, fall or remain unchanged

Explanation: Nominal GDP equals real GDP multiplied by the GDP deflator divided by 100. If real GDP rises while the deflator falls, the positive quantity effect and negative price effect work in opposite directions. For example, a 20% real increase with a 10% deflator fall raises nominal GDP, but a 5% real increase with a 20% fall lowers it. Therefore option C is correct.

Correct answer: B. It will rise by about 11.1 percent

Explanation: Using the identity Real GDP = Nominal GDP × 100 / GDP deflator, an unchanged nominal GDP and a deflator reduced to 90% of its original value imply a real-GDP factor of 1/0.90 = 1.111... Thus real GDP rises by approximately 11.1%, not exactly 10%. Option B is correct; the 10% figure ignores the reciprocal relationship.

Correct answer: A. It will fall by about 16.7 percent

Explanation: The governing relationship is Real GDP = Nominal GDP divided by the GDP deflator, after expressing the deflator as a factor. If nominal GDP is unchanged and the deflator rises by 20%, the new real GDP is old real GDP divided by 1.20, or about 0.8333 of its former value. Thus the decline is 1 − 0.8333 = 0.1667, approximately 16.7%. A 20% fall would incorrectly reverse the percentage directly.

Correct answer: C. 180

Explanation: The governing index identity is Nominal GDP index = Real GDP index × GDP deflator index ÷ 100. Using the given values, the nominal index is 125 × 144 ÷ 100 = 180. Hence option C is correct. The value 156 would reflect an incorrect multiplication or division, 168 does not satisfy the identity, and 200 ignores the index scaling by 100. The calculation combines real output with the price-level index.

Correct answer: C. 126.7

Explanation: To remove the price effect from nominal GDP, use Real GDP index = (Nominal GDP index ÷ GDP deflator index) × 100. Therefore, (171 ÷ 135) × 100 = 126.666..., which rounds to 126.7. Option C is consequently correct. Dividing 171 by 135 without multiplying by 100 gives the wrong scale, while 120, 125 and 130 do not produce the stated nominal index when combined with a deflator of 135.

Correct answer: A. About 5.6 percent rise

Explanation: Per-capita real GDP is the ratio of real GDP to population. After the changes, the ratio is 0.95 divided by 0.90, so its proportional change is (0.95 ÷ 0.90) − 1 = 0.05556, or approximately a 5.6% rise. A is correct. Total GDP falls, but population falls even faster; therefore per-person output increases. Option B overlooks the denominator, while C adds rates incorrectly and D ignores both changes.

Correct answer: A. It may rise

Explanation: Nominal GDP values current production at current market prices. Since an indirect tax is included in the market price, a higher tax can raise the recorded price of the final good even when its quantity and factor cost do not change. Therefore nominal GDP at market price may rise, while real GDP can remain unchanged. Option B is wrong because the price effect need not be negative; C ignores tax-inclusive valuation, and D is clearly impossible.

Correct answer: A. Nominal GDP may fall while real GDP remains unchanged

Explanation: Nominal GDP uses current prices, so a subsidy-induced fall in the market price can reduce the nominal value of unchanged output. Real GDP is calculated using constant or base-year prices; if the physical quantity is unchanged, its real value remains unchanged, assuming no quality change. Thus A is correct. B and C assert unsupported opposite movements, while D confuses nominal and real measures rather than describing their values.

Correct answer: B. 10 percent

Explanation: The governing concept is conversion from nominal GDP to real GDP using: Real GDP = (Nominal GDP ÷ GDP deflator) × 100. In year one, real GDP = (1,800 ÷ 120) × 100 = ₹1,500 crore. In year two, it is (2,079 ÷ 126) × 100 = ₹1,650 crore. Therefore, real growth = (150 ÷ 1,500) × 100 = 10%. Option B is correct; the other choices confuse nominal growth or price-index changes with real output growth.

Correct answer: C. 15.5 percent

Explanation: The governing relationship is Nominal GDP = (Real GDP × GDP deflator) ÷ 100. Thus year-one nominal GDP is (1,500 × 120) ÷ 100 = ₹1,800 crore, while year-two nominal GDP is (1,650 × 126) ÷ 100 = ₹2,079 crore. Nominal growth is [(2,079 − 1,800) ÷ 1,800] × 100 = 15.5%. Option C is correct. Ten percent is real growth, while 21% is the rise in the nominal GDP amount divided incorrectly.

Correct answer: B. 12.5 percent rise

Explanation: The governing formula is real GDP = nominal GDP divided by the GDP deflator. The new nominal value is 0.90 of the old value and the new deflator is 0.80 of its old value. Therefore real GDP changes by 0.90 ÷ 0.80 − 1 = 0.125, or a 12.5 percent rise. Option C overlooks the stronger fall in prices; A and D are inaccurate calculations.

Correct answer: A. 5 percent rise

Explanation: The relationship is Nominal GDP = Real GDP × GDP deflator, with both expressed as index proportions. After the changes, real GDP becomes 0.70 of its original value and the deflator becomes 1.50 times its original value. Thus nominal GDP becomes 0.70 × 1.50 = 1.05, or 105 percent of its initial value. Therefore, it rises by 5 percent, making option A correct; the other choices do not follow from the multiplication.

Correct answer: B. 20 percent rise

Explanation: Real GDP is obtained by dividing nominal GDP by the GDP deflator. Following the changes, nominal GDP is 0.84 of its original value and the deflator is 0.70 of its original value. Therefore, real GDP becomes 0.84 ÷ 0.70 = 1.20 times its original level. This represents a 20 percent increase, so option B is correct. A simple subtraction would incorrectly ignore the deflator’s denominator role.

Correct answer: A. Real output has approximately declined

Explanation: The GDP identity is Nominal GDP = GDP deflator multiplied by Real GDP, using consistent index units. Hence real output is obtained by dividing nominal GDP by the deflator. If nominal GDP rises by 10% but the deflator rises by 12%, the price-adjusted quantity must decline: 1.10 divided by 1.12 is about 0.982, or a fall of roughly 1.8%. Thus the appropriate conclusion is an approximate decline.

Correct answer: D. Slightly below one hundred four

Explanation: The governing calculation is the per-capita real output index: (new real GDP index ÷ new population index) × 100, or (108 ÷ 104) × 100. This equals approximately 103.85, which is slightly below 104. Therefore option D is correct. Option B ignores population growth, option C treats the population index as the answer, and option A incorrectly adds the two changes.