In an economy experiencing persistent deflation:
A)potential GDP will necessarily exceed actual GDP.
B)changes in nominal GDP may either overstate or understate changes in real GDP.
C)changes in nominal GDP understate changes in real GDP.
D)changes in nominal GDP overstate changes in real GDP.

Question

Quizplus · Accepted Answer

In an economy experiencing persistent deflation, prices are consistently decreasing. This means that prices used to calculate nominal GDP are lower than they were in the base year, resulting in a lower nominal GDP. However, real GDP adjusts for changes in prices, so it is less affected by deflation. Therefore, changes in nominal GDP understate changes in real GDP.

In an Economy Experiencing Persistent Deflation