Suppose a country has an inflation rate of 2 between 2013 an

Suppose a country has an inflation rate of 2% between 2013 and 2014 and its nominal GDP increases by 6% during that same period. Which of these is true? o Real GDP has shrunk by 4%. Real GDP has grown by 3% Real GDP has grown by 4% o Real GDP has shrunk by 8%

Solution

The total values of the goods and services produced in a year within the boundaries of a country is known as the nominal GDP. Real GDP is the inflation adjusted nominal GDP.

Nominal GDP increases at a rate of 6% and the inflation rate is 2%. Increase in real GDP is (6 - 2) = 4%.