Consider a simple economy that produces two goods: cupcakes and muffins. The fol
ID: 1147842 • Letter: C
Question
Consider a simple economy that produces two goods: cupcakes and muffins. The following table shows the prices and quantities of the goods over a three-year period.
Cupcakes
Muffins
Use the information from the preceding table to fill in the following table.
From 2013 to 2014, nominal GDP _______(decreased/increased), and real GDP_____ decreased/increased).
The inflation rate in 2014 was .----
Why is real GDP a more accurate measure of an economy's production than nominal GDP?
a.)Real GDP is not influenced by price changes, but nominal GDP is.
b.)Real GDP does not include the value of intermediate goods and services, but nominal GDP does.
c.)Real GDP includes the value of exports, but nominal GDP does not.
YearCupcakes
Muffins
Price Quantity Price Quantity (Dollars per cupcake) (Number of cupcakes) (Dollars per muffin) (Number of muffins) 2012 1 120 1 195 2013 2 130 4 195 2014 4 130 4 145Explanation / Answer
Answer:
2012
Nominal GDP = Price of 2012 * quantities of 2012
=1*120+1*195
=120+195
=$315
Real GDP GDP = Price of 2012 * quantities of 2012
=1*120+1*195
=120+195
=$315
GDP Deflator = (Nominal GDP/Real GDP)*100
=(315/315)*100
=100%
2013
Nominal GDP = Price of 2013 * quantities of 2013
=2*130+4*195
=260+780
=$1040
Real GDP GDP = Price of 2012 * quantities of 2013
=1*130+1*195
=130+195
=$325
GDP Deflator = (Nominal GDP/Real GDP)*100
=(1040/325)*100
=320%
2014
Nominal GDP = Price of 2014 * quantities of 2014
=4*130+4*145
=520+580
=$1100
Real GDP GDP = Price of 2012 * quantities of 2014
=1*130+1*145
=130+145
=$275
GDP Deflator = (Nominal GDP/Real GDP)*100
=(1100/275)*100
=400%
Year
Nominal GDP
Real GDP
GDP Deflator
(Dollars)
(Base year 2012, dollars)
2012
315
315
100%
2013
1040
325
320%
2014
1100
275
400%
From 2013 to 2014, nominal GDP increased, and real GDP decreased.
The inflation rate in 2014 was 400%.
Year
Nominal GDP
Real GDP
GDP Deflator
(Dollars)
(Base year 2012, dollars)
2012
315
315
100%
2013
1040
325
320%
2014
1100
275
400%