Answer the question based on the following information: Nominal GPD Price Index

Question

Answer the question based on the following information:

Nominal GPD Price Index (gdp deflator) Real gdp

$4,486.0 108

$4710.3 112

(1) between year 1 and year 2 nominal gdp has increased/decreased by what %

(2) between year 1 and year 2 price level has increased/decreased by what %

(3) frank loaned Freda $500 in year 1 to be paid back in year 2. He guessed the inflation would run at 5% and accordingly increase the interest rate on the loan. If the inflation turned out to be equal to the figure calculated in part 2, who won? Explain.

(4) the real gdp in year 1 is ?

(5) the real gdp in year 2 is ?

Explanation / Answer

Ans:

1)    Increase in nominal GDP = (($4710.3 - $4486) / $4486) * 100

   = 0.05 or 5%

2)    Increase in price level = ((112 - 108) / 108) *100

   = 0.037 or 3.7%

3) The inflation turned out to be 3.7% less than the expected 5%.Freda has won.

4) Real GDP = (Nominal GDP / GDP deflator) * 100

Year-1 = $4,486.0 / 108

= 41.537 * 100

= $4153.7

5) Real gdp Year-2 = $4710.3 / 112

= $42.056 * 100

   = $4205.6

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