Real GDP and Nominal GDP

Correct answer: B. Prices rise sharply and real output falls

Explanation: Nominal GDP values current production at current prices, whereas real GDP values production at base-year or constant prices and therefore reflects changes in physical output. If prices increase sufficiently, the price effect can make nominal GDP rise even when the actual quantity of output decreases. Thus, sharply rising prices with falling real output produce the stated situation.

Correct answer: B. Real GDP may remain nearly unchanged

Explanation: Nominal GDP is measured at current prices, so it can double simply because the general price level has doubled. Real GDP is measured using constant prices and therefore reflects changes in physical output. If prices and nominal GDP both nearly double in the same proportion, the quantity of output, and hence real GDP, may remain nearly unchanged. Therefore, option B is correct.

Correct answer: A. It will remain almost constant

Explanation: Real GDP measures the quantity of goods and services produced by valuing current output at constant base-year prices. Therefore, a rise in prices alone increases nominal GDP but does not increase real GDP. If physical production remains unchanged, real GDP remains approximately constant, apart from any measurement or rounding differences. Hence, option A is correct.

Correct answer: A. Average prices are higher than in the base year

Explanation: Nominal GDP values current production at current prices, whereas real GDP values the same production at base-year prices. Since nominal GDP is 2750 and real GDP is 2500, the implied GDP deflator is (2750/2500) × 100 = 110. Thus, the average price level is above the base-year level, not evidence that production stopped or imports became zero.

Correct answer: A. No change in real output or quantity

Explanation: Real GDP measures current production using base-year prices, so it removes the effect of price changes. Here, the price rises from 10 to 15, but the quantity remains unchanged. Therefore, the real value of output and real GDP remain unchanged, even though nominal GDP would increase because of the higher current price.

Correct answer: A. A fall in prices offset an increase in output

Explanation: Real GDP measures changes in the quantity of output using base-year prices, whereas nominal GDP uses current prices and current quantities. If production increases but the general price level falls sufficiently, the higher quantity can be exactly offset by lower prices. In that situation, real GDP rises while nominal GDP may remain unchanged.

Correct answer: D. About 6 percent

Explanation: Nominal NDP reflects both changes in quantities and changes in prices, whereas real NDP attempts to isolate the quantity or output change. Using the requested simple approximation, real growth equals nominal growth minus price growth: 15% − 9% = 6%. Therefore option D is correct. An exact calculation using deflators would be slightly different, but none is required here.

Correct answer: D. About 7 percent

Explanation: The governing concept is the difference between nominal and real changes. Nominal NDP reflects both changes in quantities and changes in prices, whereas real NDP attempts to remove the price effect. Using the simple approximation, real growth equals nominal NDP growth minus inflation: 18 percent − 11 percent = approximately 7 percent. The exact result from a deflator may differ slightly, but among the choices option D is correct.

Correct answer: A. Prices rose sufficiently

Explanation: The governing concept is that nominal NDP equals the value of current output at current prices, while real NDP measures output using constant or base-year prices. If physical output falls, real NDP can decline; at the same time, a sufficiently large increase in prices can make the current-price value rise by 10 percent. Population changes and depreciation do not by themselves explain this nominal-real divergence. Hence option A is correct.

Correct answer: B. 7,500 crore rupees

Explanation: The price index is based on 100, so real NDP is calculated as nominal NDP divided by the price index and multiplied by 100: Real NDP = ₹8,250 crore ÷ 110 × 100 = ₹7,500 crore. Therefore, option B is correct. Option C simply repeats nominal NDP, while option D multiplies by the index; option A uses an incorrect divisor or calculation.

Correct answer: C. 9,720 crore rupees

Explanation: When the price index has a base of 100, nominal NDP equals real NDP multiplied by the index and divided by 100. Thus, nominal NDP = ₹7,200 crore × 135/100 = ₹9,720 crore. Option C is correct. Option B ignores the price change, option A reverses the adjustment, and option D applies an excessive multiplier rather than the index ratio.

Correct answer: B. ₹9,000 crore

Explanation: The governing relationship is Real NDP = (Nominal NDP ÷ Price Index) × 100, when the index has a base of 100. Substituting the values gives (₹9,450 ÷ 105) × 100 = ₹9,000 crore. Because the index is above 100, the real aggregate must be lower than the nominal aggregate. Therefore, Option B is correct; Option C ignores price adjustment.

Correct answer: C. ₹12,180 crore

Explanation: The governing formula is Nominal NDP = Real NDP × (Price Index ÷ 100). Substitution gives ₹8,400 × (145 ÷ 100) = ₹8,400 × 1.45 = ₹12,180 crore. Since the price index is 145, the nominal value is 45 percent above the real, base-price value. Thus, Option C is correct; multiplying by 100 or using the inverse would produce incorrect alternatives.

Correct answer: B. ₹2,000

Explanation: Real GDP is calculated by valuing the quantity of output at base-year prices. Here, the quantity is 100 units and the base-year price is ₹20 per unit. Therefore, real GDP = 100 × ₹20 = ₹2,000. The current price is not needed for this calculation; ₹2,200 and ₹20,000 do not follow from the given quantity and base-year price.

Correct answer: B. ₹2,000

Explanation: Nominal GDP values current-year production at current-year prices. The economy produces 80 units and each unit has a current-year price of ₹25. Thus, nominal GDP = 80 × ₹25 = ₹2,000. A figure such as ₹1,600 would require a price of ₹20, while ₹2,500 would use a different quantity or price; neither matches the given current data.

Correct answer: B. ₹3,000

Explanation: Nominal GDP uses the prices prevailing in the current year, not the base-year prices. Therefore, multiply the current output by the current price: 100 × ₹30 = ₹3,000. The amount ₹2,500 is real GDP because it uses the base-year price of ₹25. The other amounts do not result from either relevant multiplication, so option B is correct.

Correct answer: B. About 7 percent

Explanation: Nominal GDP changes because of both output changes and price changes. For an approximate calculation, real GDP growth is found by subtracting inflation, represented here by the deflator increase, from nominal GDP growth: 12% − 5% = approximately 7%. Therefore, option B is correct. The exact calculation using growth ratios gives about 6.7%, which rounds to 7%; adding the rates or ignoring prices would be incorrect.

Correct answer: B. Base-year prices

Explanation: Real GDP measures the value of current production using constant prices from a selected base year. Using base-year prices prevents changes in the price level from being mistaken for changes in output. Therefore, option B is correct. Current-year prices are used for nominal GDP, while international prices are not the defining basis of real GDP measurement; the next year's prices are irrelevant.

Correct answer: C. Due to higher output or prices or both

Explanation: Nominal GDP values goods and services at current market prices, so it reflects both the quantity of output and the prices charged. It can therefore rise when output increases, when prices increase, or when both increase. Option C is correct. Option A ignores inflation, and option B ignores production growth. A fall in population alone does not necessarily raise nominal GDP and is not its defining determinant.

Correct answer: B. Real output

Explanation: Real GDP values output at constant base-year prices. Because the price effect is held constant, changes in real GDP mainly indicate changes in the quantity of goods and services produced, or real output. Therefore, option B is correct. Nominal GDP is more directly affected by price changes, while taxes and imports may influence economic activity but are not what real GDP primarily measures.

Correct answer: B. It removes the effect of price changes

Explanation: Real GDP values production at constant base-year prices, so changes in its value mainly reflect changes in the quantity of goods and services produced. This makes it more useful for comparing economic growth across years because inflation does not inflate the measured increase. Therefore, option B is correct. Nominal GDP combines output and current-price changes, while real GDP does not measure only prices, imports, or population.

Correct answer: B. Nominal GDP will rise but real GDP will remain unchanged

Explanation: Nominal GDP is measured using current prices, whereas real GDP is calculated using constant base-year prices. If output stays unchanged and only prices increase, the current-price value rises, so nominal GDP increases. Real GDP remains unchanged because its calculation removes the effect of price changes. Therefore, option B is correct; options A and C incorrectly treat price inflation as output growth, while D is opposite to the result.

Correct answer: A. Both will rise

Explanation: Nominal GDP equals the value of current output at current prices, while real GDP values output at base-year prices. When prices remain constant, an increase in physical production raises the quantity component in both calculations. Thus both nominal and real GDP increase, making option A correct. Option B ignores the effect on real production, option C ignores nominal valuation, and option D would apply only if output also remained unchanged.

Correct answer: B. Real GDP

Explanation: Economic growth means a change in the quantity of goods and services produced. Nominal GDP is affected by both output and prices, so inflation can make it rise even when production does not increase. Real GDP values current production at constant base-year prices and removes this price effect; therefore option B gives the better comparison of actual growth.

Correct answer: B. It should be a year of normal economic conditions

Explanation: A base year provides the reference prices used to calculate real GDP and price indices. It should reflect reasonably normal economic conditions, production patterns, and prices. A crisis year may contain unusually low output or abnormal prices and can distort later comparisons. Therefore a normal year, option B, is the desirable choice.