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Chapter 19: Problem 5

For each of the following statements, briefly explain whether you agree. a. "If nominal GDP is less than real GDP, then the price level must have fallen during the year." b. "Whenever real GDP declines, nominal GDP must also decline." c. "If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline." d. "Nominal GDP declined between 2008 and 2009 ; therefore, the GDP deflator must also have declined."

Short Answer

Expert verified
Statement A is true as if nominal GDP is less than real GDP, it indicates that the price level fell. Statement B is not necessarily true as real GDP might decrease due to decreased output, while nominal GDP might increase due to inflation. Statement C is generally true as a severe recession usually results in a decrease in both real and nominal GDP, and potentially a decline in price level also. Statement D is not always true as the GDP deflator could decrease, remain constant, or increase depending on the specific changes in output and price level.

Step by step solution

01

Evaluate Statement A

The statement says, 'If nominal GDP is less than real GDP, then the price level must have fallen during the year.' Nominal GDP is the value of goods and services produced in a year, measured using current prices, while real GDP is measured using constant prices. If nominal GDP is less than real GDP, then the price level must've fallen that year. This statement is indeed true. When the price level falls, nominal GDP is lower because it's using current (lower) prices.
02

Evaluate Statement B

The second statement is, 'Whenever real GDP declines, nominal GDP must also decline.' This statement is not necessarily true. Real GDP is the measure of economic output adjusted for price changes(i.e., inflation or deflation), while nominal GDP is not. It's possible for real GDP to decrease, reflecting a decrease in output, while nominal GDP increases due to inflation.
03

Evaluate Statement C

The third statement says, 'If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline.' This statement is generally true. A recession typically results in a decline in output, which would decrease both real GDP and nominal GDP. If the price level falls (deflation), then nominal GDP would also likely decline.
04

Evaluate Statement D

The final statement is, 'Nominal GDP declined between 2008 and 2009; therefore, the GDP deflator must also have declined.' This statement is not necessarily true. The GDP deflator is a measure of price inflation/deflation with respect to a specific base year. If nominal GDP declined between 2008 and 2009, it could be due to a decrease in output, price level, or both. So, the GDP deflator could decrease, remain constant, or even increase depending on the specific changes in output and price level.

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Most popular questions from this chapter

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