   Chapter 5, Problem 6CQQ

Chapter
Section
Textbook Problem

If all quantities produced rise by 10 percent and all prices fall by 10 percent, which of the following occurs?a. Real GDP rises by 10 percent, while nominal GDP falls by 10 percent.b. Real GDP rises by 10 percent, while nominal GDP is unchanged.c. Real GDP is unchanged, while nominal GDP rises by 10 percent.d. Real GDP is uncharged, while nominal GDP falls by 10 percent.

To determine

The impact of increase in quantity produced and price fall.

Explanation

The GDP is the summation of the money value of all the goods and services produced within the political boundary of a country within a financial year. There are two different ways of calculating the GDP of the economy and they are the Real GDP and the Nominal GDP.

The Real GDP is the GDP calculated at the constant prices. There will be a base price index and the value of goods and services that will be calculated on the base of the constant prices. Thus, it will measure the GDP of the economy on the same base year price index which will help us to identify the inflation in the economy. The Nominal GDP is the GDP calculated at the current prices. The GDP will be calculated by multiplying the quantity of goods and services produced with the current year market prices which will include the inflation impact.

Option (b):

When the quantity produced increases by 10 percent, it will increase the real GDP of the economy by 10 percent because the real GDP will be calculated on the base year prices and the fall in the current year price by 10 percent will not influence the real GDP. At the same time, the increase in the quantity produced and the fall in the price by the same quantity will keep the nominal GDP unchanged. Since, option 'b' explains this accurately which means that option 'b' is correct.

Option (a):

When the quantity produced increases by 10 percent, it will increase the real GDP of the economy by 10 percent because the real GDP will be calculated on the base year prices and the fall in the current year price by 10 percent will not influence the real GDP...

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