Although most countries experience an increase in both nominal and real GDP almo

Question

Although most countries experience an increase in both nominal and real GDP almost every year, it is also possible for them to move in opposite directions.

a. In the United States during 19901991, real GDP fell while nominal GDP rose. This indicates that:

b. In Japan, during several years in the 1990s, real GDP rose and nominal GDP fell, indicating that Japan:
     

c. Nominal GDP will be less than real GDP if:
     

there was an overall increase in the physical quantities of goods and services and a fall in prices by more than the increase in quantities. less physical goods were produced and the price level fell sharply. more physical goods were produced and the price level increased sharply. there was an overall reduction in the physical quantities of goods and services and a rise in prices by more than the fall in quantities.

Explanation / Answer

1.

Correct option: more physical goods were produced and the price level increased sharply.

Reason: Since real interest rate equals nominal interest rate minus inflation, a fall in real GDP amidst rise in nominal GDP implies rising inflation along with economic growth (as nominal GDP has increased)

2.

Correct option: experienced economic recession and falling prices, or deflation, at the same time.

Reason: Since real interest rate equals nominal interest rate minus inflation, a rise in real GDP amidst fall in nominal GDP implies decreasing inflation along with poor economic growth (as nominal GDP has decreased)

3.

Correct option: prices in the current year are less than prices during the base year.

Reason: Nominal GDP is calculated taking current year prices while Real GDP is calculated taking base year prices.

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