Assume that an economy’s actual output decreased from one year to the next, and it also had inflation. Which of the following statements is correct? The economy’s real GDP decrease... Assume that an economy’s actual output decreased from one year to the next, and it also had inflation. Which of the following statements is correct? The economy’s real GDP decreased, but its nominal GDP increased. The economy’s real GDP increased, but its nominal GDP decreased. The economy’s real GDP decreased, but more information is needed to know if there was any change in nominal GDP. The economy’s real GDP decreased, and its nominal GDP decreased. The economy’s real GDP increased, and its nominal GDP also increased.
Understand the Problem
The question is asking about the relationship between real GDP and nominal GDP in the context of an economy experiencing both a decrease in actual output and inflation. It requires analyzing how these changes affect the GDP metrics.
Answer
The economy’s real GDP decreased, but its nominal GDP increased.
The economy’s real GDP decreased, but its nominal GDP increased.
Answer for screen readers
The economy’s real GDP decreased, but its nominal GDP increased.
More Information
When an economy's actual output decreases but experiences inflation, the real GDP, which accounts for inflation, decreases because output is down. The nominal GDP, which does not account for inflation, may increase or remain stable due to price levels rising despite the fall in actual output.
Tips
A common mistake is confusing real GDP with nominal GDP. Remember that real GDP adjusts for inflation, while nominal GDP does not.
Sources
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