Part 1Suppose that in a given country from one year to the next, the general price level rises while the quantity of goods produced also rises. What can we determine about the values of nominal and real GDP LOADING... ?Part 2
A. Both nominal and real GDP will rise, but nominal GDP will increase more. B. Nominal GDP will rise, but real GDP will remain unchanged. C. Nominal GDP will rise, but the change in real GDP cannot be determined. D. Nominal and real GDP will increase by the same amount. E. Both nominal and real GDP will rise, but real GDP will increase more.

Question

Part 1Suppose that in a given country from one year to the​ next, the general price level rises while the quantity of goods produced also rises. What can we determine about the values of nominal and real GDP LOADING... ​?Part 2
A. Both nominal and real GDP will​ rise, but nominal GDP will increase more. B. Nominal GDP will​ rise, but real GDP will remain unchanged. C. Nominal GDP will​ rise, but the change in real GDP cannot be determined. D. Nominal and real GDP will increase by the same amount. E. Both nominal and real GDP will​ rise, but real GDP will increase more.

BlackTom AI · Accepted Answer

Rephrase of the scenario and options to set the stage: the question describes a situation in which, from one year to the next, the general price level rises and the quantity of goods produced also rises. The task is to evaluate what we can conclude about nominal GDP (which is price level × real output) and real GDP (output measured at base-year prices).

Option A: 'Both nominal and real GDP will rise, but nominal GDP will increase more.' This aligns with the basic identity for nominal GDP: Nominal = Price × Real output. If both the price level and the quantity produced increase, real GDP rises due to more output, and nominal GDP rises because the higher price level multiplies the larger quantity. Moreover, because there is a positive change in price, nominal GDP increases by more than real GDP, since real GDP excludes changes in price. Thus, this option correctly captures that both measures rise and that nominal growth outpaces real growth.

Option B: 'Nominal GDP will rise, but real GDP will remain unchanged.' This would imply no increase in quantity, only prices. However, the premise states that quantity produced also rises, so real GDP cannot remain unchanged. The claim contradicts the fact that real GDP tracks quantity, so this option is incorrect.

Option C: 'Nominal GDP will rise, but the change in real GDP cannot be determined.' Given we know both price and quantity move up, we can determine that real GDP rises because more goods are produced at base-year prices. Therefore, asserting an indeterminacy about real GDP is not warranted. This makes C inaccurate.

Option D: 'Nominal and real GDP will increase by the same amount.' Since nominal GDP change includes both a higher price and higher quantity, and real GDP captures only the change in quantity (holding prices constant), the nominal change should exceed the real change when prices rise and output grows. Therefore, D misstates the relationship between nominal and real GDP changes in this scenario.

Option E: 'Both nominal and real GDP will rise, but real GDP will increase more.' This would require that the quantity increase outpaces the effect of price changes on nominal GDP to yield a larger real GDP increase than nominal. Because nominal GDP also benefits from the rising price, its percentage increase tends to be equal to or greater than the real GDP increase when both price and quantity rise. Thus E is unlikely and inconsistent with the standard interpretation of nominal versus real GDP dynamics in the presence of positive price and quantity changes.

In summary, analyzing how nominal GDP combines price and quantity, and recognizing that real GDP responds only to quantity while nominal also incorporates the price rise, leads to the conclusion that both rise and that nominal growth is larger than real growth. This makes Option A the correct characterization among the provided choices, while B, C, D, and E misstate the relationships given the stated changes in price and output.

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