Question

In Year I the sum of Consumption + Investment + Government Expenditures was $100,000. The nominal GDP for that year was also $100,000. Furthermore the nominal GDP for year II was $101,000 while the inflation rate was 5 percent. Therefore:

a.         The real GDP in Year II increased.

b.         The nominal GDP in Year II increased.

c.         The value of imports was equal to the value of exports in Year I.

d.         All of the above.

e.         Both b) and c) are correct.

Answer 1

Because the sum of consumption investment and government expenditure is given at 100000 and that nominal GDP in that year is also 100000, it appears that real GDP is also same at 100000. In 2nd year, nominal GDP increases by 1% (by 1000) and inflation rate is 5% which indicates that real GDP will actually decrease by 4%. There are no exports and imports shown in the given information we can expect them to be cancelling out each other.

This implies that option B and C are correct. Select (E)