If the GDP deflator in 2009 was 120 compared to a value of 100 during the 2004 base year, this would indicate that
A) the inflation rate during 2009 was 20 percent.
B) the general level of prices during 2009 was 20 percent higher than during 2004.
C) the inflation rate during 2009 was 120 percent.
D) real GDP was 20 percent higher in 2009 than 2004.

Question

Quizplus · Accepted Answer

The GDP deflator measures the change in the general level of prices in an economy over time. If the GDP deflator in 2009 was 120 compared to a value of 100 during the 2004 base year, then the general level of prices during 2009 was 20 percent higher than during 2004 (100 to 120 is a 20% increase). Option A is incorrect as it suggests that the inflation rate during 2009 was 20%, whereas the GDP deflator tells us about the overall change in prices, not the inflation rate over a specific period. Option C is incorrect because the inflation rate cannot be 120%. Option D is incorrect because the GDP deflator measures the nominal value of output, which includes the effects of inflation. In order to determine the real value of output, we need to adjust for changes in the level of prices over time, which is done using the GDP deflator.

If the GDP Deflator in 2009 Was 120 Compared to a Value