Q#2 a) First, define nominal GDP and real GDP. Second, is it possible for nomina
ID: 1155818 • Letter: Q
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Q#2 a) First, define nominal GDP and real GDP. Second, is it possible for nominal GDP in a year to be less than real GDP in the same year? Explain. (5 points) b) Will the CPI and GDP deflator always move together? Explain. (5 points) Q#3 a) Suppose the Chinese economy is represented by the following equations: Z- C+I+G YD = Y-T C 500+0.5YDT G-2000 600 300 i. Given the above variables, calculate the equilibrium level of output. Hint: First specify (using the above numbers) the demand equation (Z) for this economy. Second, using the equilibrium condition, equate this expression with Y. Once you have done this, solve for the equilibrium level of output. Using the ZZ-Y graph (i.e., a graph that includes the ZZ line and 45-degree line with Z on the vertical axis, and Y on the horizontal axis), illustrate the equilibrium level of output for this economy. (4 points)Explanation / Answer
2) a) Nominal GDP is the value of the goods produced in a country at current prices in a given year and it is not accounted or adjusted for inflation and deflation.Real GDP is the value of goods and services produced in a country adjusted for inflation or deflation by keeping the price constant.
Prices generally keep increasing over time so the Nominal GDP will be greater than the Real GDP but it is possible for Nominal GDP to be less than Real GDP when there is deflation in the economy.During deflation,the current prices will fall resulting in lower Nominal GDP while the Real GDP will be higher at the constant price.
b)No,the GDP deflator and the CPI are rarely exactly the same, almost always move together, and only rarely is there a large disconnect between the two results. The CPI and the GDP deflator move together most of the time. The GDP deflator reflects the prices of all goods produced domestically, while the CPI reflects the prices of all goods bought by consumers. The CPI compares the prices of a fixed basket of goods over time, while the GDP deflator compares the prices of the goods currently produced to the prices of the goods produced in the base year.
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