If nominal GDP and the GDP deflator both rise by 5%, then real GDP is unchanged.

Question

Quizplus · Accepted Answer

Nominal GDP measures the total value of goods and services produced in an economy using current market prices, while real GDP measures the total value of goods and services produced in an economy using constant market prices. The GDP deflator is a price index that measures the nominal GDP relative to the real GDP.

If both nominal GDP and the GDP deflator rise by the same percentage, such as 5%, then real GDP would remain unchanged because the increase in nominal GDP would be due solely to a rise in prices rather than actual economic growth. In other words, the increase in the GDP deflator would cancel out the increase in nominal GDP, resulting in no change in real GDP.

If Nominal GDP and the GDP Deflator Both Rise by 5