A country reported nominal GDP of $100 billion in 2010 and $75 billion in 2009. It also reported a GDP deflator of 125 in 2010 and 120 in 2009. Between 2009 and 2010,

Question

a.

real output and the price level both rose.
b.

real output and the price level both fell.
c.

real output rose and the price level fell.
d.

real output fell and the price level rose.

Answer 1

To determine how real output and the price level changed between 2009 and 2010, we can calculate the real GDP for both years and analyze the changes.

1. Calculate Real GDP:
   • Real GDP = Nominal GDP / (GDP Deflator / 100)

For 2009:

• Nominal GDP (2009) = $75 billion
• GDP Deflator (2009) = 120
• Real GDP (2009) = $75 billion / (120 / 100) = $75 billion / 1.2 = $62.5 billion

For 2010:

• Nominal GDP (2010) = $100 billion
• GDP Deflator (2010) = 125
• Real GDP (2010) = $100 billion / (125 / 100) = $100 billion / 1.25 = $80 billion

2. Analyze Changes:

• Real GDP increased from $62.5 billion in 2009 to $80 billion in 2010.
• Real GDP increased by $80 billion - $62.5 billion = $17.5 billion (an increase).

Now, let's find out about the price level:

• The GDP deflator increased from 120 (2009) to 125 (2010).

This indicates that the price level rose between 2009 and 2010.

Therefore, the conclusion is:

• Real output rose and the price level rose.

Thus, the correct answer is: a. real output and the price level both rose.