When there is inflation (LO5) a) real GDP increases faster than nominal GDP b) nominal GDP increases faster than real GDP c) nominal GDP and real GDP increase at the same rate d) there is no way of telling whether nominal GDP or real GDP increases faster

Nominal Gross Domestic Product (GDP) measures the value of goods and services produced in an economy within a given time period, at current prices. Real GDP measures the value of goods and services produced in an economy, at constant prices. These constant prices take inflation into account, meaning that it measures changes in production with no consideration of changes in the price level. Now, let's discuss the effect of inflation on real GDP and nominal GDP.

Inflation is a general increase in the overall price level of goods and services in an economy. As prices increase, the value of goods and services produced within the economy goes up, even if the production volume remains the same. As a result, nominal GDP is affected by the inflation rate as it increases with increasing prices.

Real GDP, on the other hand, takes inflation into account, removing the effects of price changes on the measurement. Real GDP is not influenced by inflation directly as it measures changes in production with no consideration of changes in the price levels.

Now that we understand the relationship between inflation, nominal GDP, and real GDP, let's look at the given options: a) Real GDP increases faster than nominal GDP: This statement is incorrect, as real GDP takes out the effect of inflation and nominal GDP doesn't. b) Nominal GDP increases faster than real GDP: When there is inflation, nominal GDP may increase faster than real GDP since the nominal GDP measures the value of production at current prices, which are increasing due to inflation. c) Nominal GDP and real GDP increase at the same rate: This statement is incorrect, as inflation affects nominal GDP, but real GDP takes out the effect of inflation. d) There is no way of telling whether nominal GDP or real GDP increases faster: Although it might be true in some situations, generally, in the presence of inflation, nominal GDP tends to increase faster than real GDP. Based on our analysis, the correct choice is:

b) Nominal GDP increases faster than real GDP when there is inflation.