Question

1. Nominal GDP increases from $5 trillion to $5.5 trillion while the price level increases by 10%. Has real income increased?

2. Nominal GDP increases from $6 trillion to $6.8 trillion while real GDP increases from $6 trillion to $6.2 trillion. What happened to the price level?

3. Nominal GDP increases from $7 trillion to $8 trillion while real GDP increases from $7 trillion to $7.5 trillion. By what percent did real income change?

Answer 1

a. % increase in income = [(5.5 - 5) / 5] * 100 = 10%.

So, the real income has not increases, because both price and nominal income increased by 10%.

b. GDP deflator in base year = (NGDP / RGDP) * 100 = (6 trillion / 6 trillion) * 100 = 100

    GDP deflator in current year = (NGDP / RGDP) * 100 = (6.8 trillion / 6.2 trillion) * 100 = 109.7

    Increase in price level = [(109.7 - 100) / 100] * 100 = 9.7%.

    Thus, price level will increase by 9.7%.

c. Increase in real income = [(7.5 - 7) / 100] * 100 = 7.14%.