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 and real GDP will increase by the same amount. D. Nominal GDP will rise, but the change in real GDP cannot be determined. 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 and real GDP will increase by the same amount. D. Nominal GDP will​ rise, but the change in real GDP cannot be determined. E. Both nominal and real GDP will​ rise, but real GDP will increase more.

BlackTom AI · Accepted Answer

We need to analyze what happens to nominal GDP and real GDP when both the price level and output (quantity of goods produced) rise from one year to the next.

Option A: 'Both nominal and real GDP will rise, but nominal GDP will increase more.' This aligns with the definitions: nominal GDP is the current price level times current quantity, so if both prices and quantities go up, nominal GDP definitely rises. Real GDP is measured using a fixed, base-year price, so it captures changes in quantity alone; with quantity increasing, real GDP also increases. Because price changes contribute to nominal GDP beyond the quantity effect, nominal GDP tends to rise by more than real GDP. This makes Option A a plausible correct description of the scenario.

Option B: 'Nominal GDP will rise, but real GDP will remain unchanged.' If the quantity produced increases, real GDP must rise when measured at base-year prices. Therefore this option incorrectly claims a rise in prices without any quantity-driven real output increase.

Option C: 'Nominal and real GDP will increase by the same amount.' This would imply the price level change has no separate effect on the nominal measure beyond the real measure, which is unlikely because nominal GDP includes price changes while real GDP excludes them. Therefore the two would not generally increase by the exact same amount when prices rise.

Option D: 'Nominal GDP will rise, but the change in real GDP cannot be determined.' Given we know both the price level and quantity rise, we can determine that real GDP rises due to higher output, so this option incorrectly claims indeterminacy.

Option E: 'Both nominal and real GDP will rise, but real GDP will increase more.' While it’s possible in some scenarios that the quantity rise is large enough to push real GDP up significantly, the real GDP increase is driven solely by quantity (priced at base year), whereas nominal GDP also includes the price increase. In most standard interpretations, the price rise contributes to nominal GDP but not to real GDP, so real GDP does not outpace nominal GDP. Therefore this option asserts a relationship (real exceeding nominal) that is not supported by the basic measurement definitions here.

Putting it together, the scenario described—a higher price level coupled with higher output—results in both measures increasing, with nominal GDP typically increasing by more due to the price effect. This makes Option A the most accurate description among the choices.

Quiz:Quiz 1

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