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Chapter 7: Q8. (page 152)

Suppose that this year’s nominal GDP is \(16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level 5 years ago. Using that index, we find that this year’s real GDP is \)15 trillion. Given those numbers, we can conclude that the current value of the index is:

a. higher than 100.

b. lower than 100.

c. still 100.

Short Answer

Expert verified

Option (a):higher than 100

Step by step solution

01

Meaning of nominal and real GDP

The nominal GDP shows the unadjusted value of the output produced within the country, and the real GDP shows the inflation-adjusted value of output produced within the country.

The price index is used to convert nominal GDP to real GDP and is given by:

PriceIndex=NominalGDPRealGDP×100

02

Explanation for choosing option (a)

If the nominal GDP in the current year is $16 trillion and the real GDP is $15 trillion, then Price Index will be 106.66, as calculated below.

PriceIndex=NominalGDPRealGDP×100=16trillion15trillion×100=106.66

The price index is 106.66, which is higher than 100. Thus, option ‘a’ is correct.

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Most popular questions from this chapter

Why is gross output a better measure of overall economic activity than GDP is? How could you construct a new statistic that focuses only on nonfinal economic activity? Given what you know about the behavior of GO and GDP during the Great Recession, would you expect your new statistic to show more or less volatility than GO and GDP? Why? How would you rank the three in terms of volatility?

Which of the following items are included in official U.S. GDP statistics? Select one or more answers from the choices shown.

a. Revenue generated by illegal marijuana growers.

b. money spent to clean up a toxic waste site in Ohio.

c. Revenue generated by legal medical marijuana sales in California.

d. The dollar value of the annoyance felt by local citizens living near a noisy airport in Georgia.

e. Andre paying Ted for a haircut in Chicago.

f. Emily and Aliya trading an hour of dance lessons for a haircut in Dallas.

Assume that a grower of flower bulbs sells its annual output of bulbs to an Internet retailer for \(70,000. The retailer, in turn, brings in \)160,000 from selling the bulbs directly to final customers. What amount would these two transactions add to personal consumption expenditures and thus to GDP during the year?

Which of the following transactions are counted in GDP?Select one or more answers from the choices shown.

a. Kerry buys a new sweater to wear this winter.

b. Patricia receives a Social Security check.

c. Roberto gives his daughter \(50 for her birthday.

d. Nayana sells \)1,000 of General Electric stock.

e. Jasmine buys a new car.

f. Molly buys a used car

Why do national income accountants compare the market value of the total outputs in various years rather than actual physical volumes of production? What problem is posed by any comparison over time of the market values of various total outputs? How is this problem resolved?
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