If nominal GDP is increasing but real GDP is constant, what may be the main reason?
Answer and explanation
Correct answer: An increase in the general price level
Nominal GDP values current production at current prices, so it can rise because of higher prices, higher output, or both. Real GDP values production at base-year prices and therefore removes the effect of current price changes. If real GDP is unchanged but nominal GDP rises, the most direct explanation is an increase in the general price level, such as inflation, while the physical volume of production remains constant.
Frequently asked questions
What is the correct answer to this question?
An increase in the general price level
Why is this the correct answer?
Nominal GDP values current production at current prices, so it can rise because of higher prices, higher output, or both. Real GDP values production at base-year prices and therefore removes the effect of current price changes. If real GDP is unchanged but nominal GDP rises, the most direct explanation is an increase in the general price level, such as inflation, while the physical volume of production remains constant.
Which subject and chapter does this question cover?
This is a Class 12 Economics question. Chapter: National Income and Related Aggregates. Topic: Real GDP and Nominal GDP.
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