Real GDP and Nominal GDP

Correct answer: B. It rises by 66.67 percent

Explanation: Because nominal GDP equals the price level multiplied by real output, the price-level ratio is the nominal-GDP ratio divided by the real-GDP ratio. Taking initial values as 1, the ratios are 1.25 and 0.75. Thus the price ratio is 1.25 ÷ 0.75 = 1.6667. The price level therefore rises by (1.6667 − 1) × 100 ≈ 66.67 percent, making B correct.

Correct answer: A. 14.29 percent fall

Explanation: Nominal GDP equals the price level multiplied by real GDP, so the price-level ratio is the nominal-GDP growth factor divided by the real-GDP growth factor. The ratio is 0.90 ÷ 1.05 = 0.85714. Hence the price level changes by (0.85714 − 1) × 100 = −14.29%, meaning a fall of about 14.29%. Option A is correct; subtracting 10% and 5% directly gives only an approximation, not the exact rate.

Correct answer: A. Old price weights do not properly represent the current production structure

Explanation: Real GDP is calculated by valuing output with prices or weights from a base year. If new goods become important later, their absence or very small weight in the old base-year basket fails to represent the economy’s current production structure and consumer choices. Consequently, measured real growth may be biased. Option A states this problem correctly; the other options are false because new goods do not have zero quantity, nominal GDP remains measurable, and prices do not automatically equalize.

Correct answer: A. Real rises by 20 percent and nominal falls by 4 percent

Explanation: Real GDP isolates the quantity change when prices are held constant, so a 20% rise in output means real GDP rises by 20%. Nominal GDP reflects both quantity and price changes. Its factor is 1.20 × 0.80 = 0.96, so nominal GDP becomes 96% of its original value and falls by 4%. Therefore option A is correct; percentage increases and decreases cannot simply be cancelled.

Correct answer: A. 5.8 percent rise

Explanation: Nominal GDP combines the effects of real output and the price level multiplicatively, not by simply adding or subtracting percentage changes. Taking the initial nominal GDP as 1, the new ratio is 0.92 × 1.15 = 1.058. Thus nominal GDP becomes 105.8 percent of its initial value and rises by exactly 5.8 percent. Options B and C use incorrect arithmetic, while D reverses the direction.

Correct answer: A. It remains equal to the base-year level

Explanation: Nominal GDP is calculated using current prices and current quantities. If every price is multiplied by 2 and every quantity is multiplied by 0.5, the total value is multiplied by 2 × 0.5 = 1. Therefore, assuming the same goods and corresponding quantities, current nominal GDP remains equal to the base-year value. Option B ignores the quantity fall, C ignores the price rise, and D multiplies the effects incorrectly.

Correct answer: A. 1.89 percent fall

Explanation: Real GDP per capita equals real GDP divided by population, so the relevant ratio is 1.04 ÷ 1.06 = 0.981132 approximately. The new per-capita value is therefore about 98.113 percent of the old value, implying a fall of 1.887 percent, rounded to 1.89 percent. Option B is only a rough subtraction, while C and D have the wrong direction or magnitude.

Correct answer: B. Real GDP will fall

Explanation: The governing relationship is Real GDP = (Nominal GDP ÷ GDP deflator) × 100, when the deflator is expressed as an index. Real GDP therefore depends on the ratio of the nominal value to the price index. If nominal GDP increases but the deflator increases by a larger proportion, the denominator grows faster than the numerator, so the ratio and hence real GDP decrease. Thus option B is correct; option A reverses the ratio logic, while C and D ignore the stated relative changes.

Correct answer: B. It must be valued at an appropriate constant price

Explanation: Production for own consumption is still domestic production and may be assigned an imputed market value for GDP accounting. To measure real GDP, the effect of price changes must be removed; therefore the relevant quantity should be valued using a base-year or otherwise appropriate constant price. Option B is correct. Current-price valuation measures nominal GDP, while treating the output as an import or excluding it would omit genuine domestic production.

Correct answer: A. About a 1.9 percent fall

Explanation: Per-capita real GDP changes by the output growth factor divided by the population growth factor, minus one: (1.04 ÷ 1.06 − 1) × 100 ≈ −1.89%. Thus real GDP per person falls by about 1.9%. Option A is correct because population grows faster than output; subtracting 6% from 4% gives only a rough approximation.

Correct answer: A. About a 5.1 percent fall

Explanation: Use growth factors rather than simply subtracting the two rates. Real GDP becomes 0.93 of its original value and population becomes 0.98, so per-capita GDP changes by (0.93 ÷ 0.98 − 1) × 100 ≈ −5.10%. It therefore falls by about 5.1%, making A correct. A smaller population does not offset the larger output decline completely.

Correct answer: A. To better reflect current production composition and relative prices

Explanation: A chain-weighted quantity index updates weights regularly so that the measured change in output reflects the economy’s changing production mix and relative prices. This is especially useful when consumers and firms substitute toward new or relatively cheaper goods. It reduces the distortion associated with a fixed, outdated base-year structure. Therefore A is correct; the method does not eliminate nominal GDP or set inflation to zero.

Correct answer: C. 120

Explanation: The GDP deflator measures the price level of currently produced final goods relative to the base year. Its formula is (Nominal GDP / Real GDP) × 100. Therefore, deflator = (₹768 / ₹640) × 100 = 1.2 × 100 = 120. Option C is correct. The alternatives result from using an incorrect denominator or failing to multiply the ratio by 100.

Correct answer: B. 20.96 percent

Explanation: Nominal GDP equals the product of quantities and current prices. Thus, its growth factor is the quantity factor multiplied by the price factor: 1.12 × 1.08 = 1.2096. The exact nominal GDP growth is therefore (1.2096 − 1) × 100 = 20.96%. Option B is correct. Adding 12% and 8% gives only an approximation and misses the interaction term of 0.96%.

Correct answer: A. 3.33 percent

Explanation: Real GDP growth is obtained by removing the price-level effect from nominal GDP growth. The real growth factor is (1 + nominal growth) / (1 + price growth) = 1.24 / 1.20 = 1.03333. Hence real GDP growth is approximately (1.03333 − 1) × 100 = 3.33%. Option A is correct. Subtracting 20% directly from 24% gives 4%, only a rough approximation, not the exact rate.

Correct answer: A. 8 percent rise

Explanation: Nominal GDP is the product of the price level and output quantity. A 10% fall in quantity changes its factor to 0.90, while a 20% price rise changes the price factor to 1.20. The combined factor is 0.90 × 1.20 = 1.08, so nominal GDP becomes 108% of its original value and rises by exactly 8%. Directly adding or subtracting the percentages would be incorrect.

Correct answer: B. 0.25 percent fall

Explanation: Nominal GDP equals real GDP multiplied by the price index factor. A 5% fall in real GDP gives a factor of 0.95, and a 5% rise in the deflator gives a factor of 1.05. Their product is 0.95 × 1.05 = 0.9975, or 99.75% of the original nominal GDP. Therefore nominal GDP falls by 0.25%, making option B correct.

Correct answer: A. Real doubles and nominal remains unchanged

Explanation: Real GDP is calculated using constant base-year prices, so doubling every output quantity doubles real GDP. Nominal GDP uses current prices and quantities: the combined multiplier is 2 × 0.5 = 1. Thus the fall in prices exactly offsets the rise in quantities, leaving nominal GDP unchanged. Therefore A is correct; the other options confuse the separate quantity and price effects.

Correct answer: A. 8.33 percent

Explanation: Because the GDP deflator equals nominal GDP divided by real GDP, its growth factor is 1.30 ÷ 1.20 = 1.08333. Subtracting 1 and multiplying by 100 gives an exact growth rate of about 8.33 percent. The 10 percent answer is only the difference between the two growth rates and ignores compounding through the ratio. Therefore A is correct.

Correct answer: B. 5 percent

Explanation: Nominal GDP equals the price level multiplied by real GDP. After the changes, nominal GDP has a factor of 0.84 and the price level has a factor of 0.80. Therefore the real GDP factor is 0.84 ÷ 0.80 = 1.05, meaning real GDP increases by 5 percent. Option A is the simple percentage-point difference and is not exact; hence B is correct.

Correct answer: A. 0 percent

Explanation: Real GDP equals nominal GDP divided by the GDP deflator, with the deflator expressed as an index. If nominal GDP changes by a factor of 1.10 and the deflator also changes by 1.10, the real-GDP factor is 1.10 ÷ 1.10 = 1. Hence real GDP remains unchanged and its exact growth rate is 0 percent. Option C incorrectly treats the nominal increase as real growth; option A is correct.

Correct answer: A. No change

Explanation: Nominal GDP equals real GDP multiplied by the price level. A 25 percent rise in real GDP gives a factor of 1.25, and a 20 percent fall in the price level gives a factor of 0.80. Their product is 1.25 × 0.80 = 1.00, so nominal GDP remains unchanged. Simply subtracting 20 from 25 would be incorrect because percentage changes combine multiplicatively. Therefore, option A is correct.

Correct answer: B. 5.56 percent

Explanation: Because nominal GDP equals real GDP multiplied by the price level, the price-level factor is the nominal-GDP factor divided by the real-GDP factor. After the changes, these factors are 0.95 and 0.90. Thus the price-level factor is 0.95 ÷ 0.90 = 1.0556 approximately, implying a rise of about 5.56 percent. Directly subtracting 10 from 5 gives the wrong result, so option B is correct.

Correct answer: A. 2.91 percent

Explanation: Real GDP per capita equals real GDP divided by population. Therefore, its growth factor is 1.06 ÷ 1.03 = 1.029126. Subtracting 1 and multiplying by 100 gives approximately 2.91 percent. Option A is correct. Option B is only the rough subtraction of 6 minus 3, while C ignores population growth and D adds the two rates.

Correct answer: A. 8.70 percent fall

Explanation: The governing identity is nominal GDP = real GDP × price level. Taking the initial values as 1, the new price-level factor is 1.05 ÷ 1.15 = 0.913043. Hence the price level changes by (0.913043 − 1) × 100 = −8.6957%, approximately an 8.70% fall, so A is correct. A 10% fall comes from subtracting rates and is not exact.