Real GDP and Nominal GDP

Correct answer: B. 15.8 percent

Explanation: Successive annual growth rates compound rather than simply add. Taking the initial real GDP as 1, the value after three years is 1.05 × 1.05 × 1.05 = 1.157625. The total increase is therefore 0.157625, or approximately 15.8 percent. Option A ignores compounding, while C and D overstate the result. Hence option B is the correct approximate answer.

Correct answer: B. About 19.9 percent

Explanation: Real GDP is obtained by removing the price effect from nominal GDP. The annual real-growth factor is \(1.15\) divided by \(1.05\), approximately \(1.095238\). Over two years the factor is \(\left(\frac{1.15}{1.05}\right)^2\), so total real growth is approximately \(1.19955 - 1 = 19.9\) percent. Option A subtracts rates too simply, C rounds too roughly, and D incorrectly combines nominal growth.

Correct answer: B. 4 percent fall

Explanation: A deflator is an index of the price level, so its successive percentage changes must be compounded. Starting with an index of 100, a 20 percent rise gives 120. A 20 percent fall is then taken from 120, producing 120 × 0.80 = 96. The final index is therefore 4 percent below the starting level. Option B is correct; the equal percentages do not cancel because the bases differ.