AP Macroeconomics Quiz: Real Vs Nominal Gdp

What this quiz covers

This quiz focuses on Real Vs Nominal Gdp, giving you a quick way to practice the rules, question types, and explanations that matter most for AP Macroeconomics.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. nominal GDP and the distribution of income.
2. real GDP per capita. (correct answer)
3. the national debt.
4. the balance of payments.

Explanation: An improvement in the standard of living implies that, on average, more goods and services are available per person. The best measure for this is real GDP per capita, which adjusts total output for both inflation (using real GDP) and population growth (per capita). The news report likely refers to nominal GDP, which is insufficient for this analysis.

Question 2

1. Nominal GDP and real GDP both increased.
2. Nominal GDP increased, and real GDP remained constant. (correct answer)
3. Nominal GDP remained constant, and real GDP increased.
4. Nominal GDP decreased, and real GDP remained constant.

Explanation: Real GDP measures the quantity of production, so if the quantity is unchanged, real GDP remains constant. Nominal GDP measures the value of production at current prices. If prices increase while quantity stays the same, the total value (Nominal GDP) will increase.

Question 3

1. a fixed basket of consumer goods and services purchased by urban households.
2. all final goods and services produced domestically in an economy. (correct answer)
3. stocks and bonds traded on the nation's primary financial exchanges.
4. raw materials and other inputs purchased by producers.

Explanation: The GDP deflator reflects the prices of all final goods and services produced within a country. This makes it a broader measure of inflation than the Consumer Price Index (CPI), which only considers a fixed basket of consumer goods (A). Choice (D) describes a Producer Price Index (PPI).

Question 4

1. determining the level of government tax revenues in current dollars.
2. making meaningful comparisons of economic output across different time periods. (correct answer)
3. calculating the size of the national debt relative to the current value of production.
4. assessing the profitability of a nation's corporations in a specific fiscal year.

Explanation: The primary purpose of real GDP is to facilitate comparisons of production over time by removing the distorting effect of price changes. By holding prices constant, we can see if the actual volume of goods and services produced has increased, decreased, or stayed the same.

Question 5

1. The nominal GDP growth rate will be higher than the real GDP growth rate.
2. The nominal GDP growth rate will be lower than the real GDP growth rate. (correct answer)
3. The nominal and real GDP growth rates will be approximately equal.
4. Nominal GDP will be positive, while real GDP will be negative.

Explanation: The approximate relationship is: %Δ Nominal GDP ≈ %Δ Real GDP + Inflation Rate. During deflation, the inflation rate is negative. Therefore, the nominal GDP growth rate will be less than the real GDP growth rate. For example, if real GDP grows by 2% and prices fall by 3%, nominal GDP will fall by approximately 1%.

Question 6

1. Year 2 by the prices that existed in Year 1. (correct answer)
2. Year 2 by the prices that existed in Year 2.
3. Year 1 by the prices that existed in Year 2.
4. Year 1 by the prices that existed in Year 1.

Explanation: The definition of real GDP is the value of current output measured at constant, base-year prices. Therefore, to calculate real GDP for Year 2, one must use the quantities from Year 2 and the prices from the base year, which is Year 1.

Question 7

1. Real GDP for 2015 would be less than nominal GDP for 2015.
2. Real GDP for 2015 would be greater than nominal GDP for 2015. (correct answer)
3. Real GDP for 2015 would be equal to nominal GDP for 2015.
4. The relationship cannot be determined without knowing the quantities produced.

Explanation: Real GDP for 2015 is calculated using 2015 quantities and 2020 prices. Because of inflation, prices in 2020 were higher than in 2015. Therefore, valuing 2015 output at the higher 2020 prices will result in a real GDP value that is greater than the nominal GDP for 2015, which was valued at the lower 2015 prices.

Question 8

1. It increased by 3%.
2. It decreased by 3%.
3. It increased by 7%. (correct answer)
4. It increased by 2.5%.

Explanation: The percentage change in nominal GDP is approximately the sum of the percentage change in real GDP and the inflation rate (the percentage change in the price level). Thus, %Δ Nominal GDP ≈ 2% + 5% = 7%.

Question 9

1. $20,000
2. $22,200
3. $22,250 (correct answer)
4. $23,200

Explanation: Real GDP is calculated using current year quantities and base year prices. In the current year, 220 pairs of shoes and 450 shirts were produced. Valuing these at base year prices: (220 shoes × $50/shoe) + (450 shirts ×$25/shirt) = $\$11,000 +$11,250 = $22,250.

Question 10

1. The price level, as measured by the GDP deflator, increased by approximately 4%. (correct answer)
2. The price level, as measured by the GDP deflator, increased by approximately 10%.
3. The price level, as measured by the GDP deflator, decreased by approximately 4%.
4. The price level, as measured by the GDP deflator, remained constant.

Explanation: The percentage change in nominal GDP is approximately equal to the percentage change in real GDP plus the inflation rate (percentage change in the price level). Therefore, Inflation Rate ≈ %Δ Nominal GDP - %Δ Real GDP. In this case, 7% - 3% = 4%. This indicates an increase in the overall price level.

Question 11

1. When the economy is experiencing a high and rising rate of inflation.
2. When the central bank is actively pursuing contractionary monetary policy.
3. When the overall price level in the economy is stable. (correct answer)
4. When the economy is in a deep recession with high unemployment.

Explanation: If the price level is stable, the inflation rate is zero. Since the change in nominal GDP reflects changes in both price and output, a stable price level means that any change in nominal GDP is due solely to a change in real output. Therefore, the two measures would change by the same amount.

Question 12

1. The unemployment rate is equal to the natural rate of unemployment.
2. The inflation rate is zero.
3. Nominal GDP is equal to real GDP. (correct answer)
4. The economy is at its full-employment level of output.

Explanation: By definition, the base year is the benchmark against which other years are compared. In this year, current prices are the same as base-year prices, so nominal GDP (valued at current prices) and real GDP (valued at base-year prices) are identical. This also means the GDP deflator for the base year is 100.

Question 13

1. The total value of all final goods and services produced within a country's borders in a given year, measured using the prices of a base year. (correct answer)
2. The total value of all final goods and services produced within a country's borders in a given year, measured using the prices of the current year.
3. The total value of all production within a country, adjusted for population growth and reported on a per capita basis.
4. The total income earned by a country's citizens, including income from abroad, adjusted for changes in the unemployment rate.

Explanation: Real GDP measures an economy's production of final goods and services valued at constant, or base-year, prices. This adjustment removes the effects of inflation, providing a clearer picture of changes in output. Choice (B) describes nominal GDP. Choices (C) and (D) describe different economic measures (GDP per capita and GNP adjusted for unemployment, respectively).

Question 14

1. 83.3
2. 1.2
3. 120 (correct answer)
4. 20

Explanation: The formula for the GDP deflator is (Nominal GDP / Real GDP) x 100. Plugging in the given values: ($12 trillion /$10 trillion) x 100 = 1.2 x 100 = 120. The GDP deflator is an index number.

Question 15

1. Real GDP accounts for changes in the quality of goods and services, whereas nominal GDP does not.
2. Real GDP includes non-market transactions, providing a more complete picture of economic activity.
3. Real GDP is adjusted for changes in the price level, isolating changes in the volume of production. (correct answer)
4. Real GDP reflects the distribution of income, which is a key component of sustainable growth.

Explanation: Economic growth is defined as an increase in the production of goods and services. Real GDP removes the effect of price changes (inflation or deflation), so it reflects changes only in the quantity of output. Nominal GDP can increase simply because of rising prices, without any actual increase in production.

Question 16

1. A recessionary gap has opened.
2. The economy experienced inflation.
3. The economy experienced deflation. (correct answer)
4. The government increased its spending.

Explanation: Real GDP reflects the quantity of output, while nominal GDP reflects both quantity and price. If the quantity of output (Real GDP) rises but the value of that output at current prices (Nominal GDP) falls, it must be because the overall price level has decreased, which is known as deflation.

Question 17

1. Real GDP decreased from $200 billion to$190.5 billion.
2. Real GDP increased from $200 billion to$210 billion.
3. Real GDP remained constant at $200 billion. (correct answer)
4. Real GDP increased from $200 billion to$205 billion.

Explanation: Calculate real GDP for both years. Year 1 is the base year since the deflator is 100, so Real GDP = Nominal GDP = $\$200 billion. For Year 2, Real GDP = ($210 billion / 105) x 100 = $200 billion. Thus, real GDP remained constant.

Question 18

1. $400 billion
2. $600 billion
3. $750 billion
4. $900 billion (correct answer)

Explanation: The relationship is given by: Nominal GDP = Real GDP x (GDP Deflator / 100). Plugging in the numbers: Nominal GDP = $$$600 billion x (150 / 100) = $600 billion x 1.5 = $900 billion.

Question 19

1. 0% (correct answer)
2. 10%
3. 2.5%
4. -2.5%

Explanation: First, calculate real GDP for both years. Real GDP = (Nominal GDP / Deflator) x 100. For Year 1: (500 / 125) x 100 = $400 billion. For Year 2: (550 / 137.5) x 100 = $400 billion. Since real GDP did not change, the growth rate was 0%.

Question 20

1. $12.5 trillion
2. $20 trillion (correct answer)
3. $25 trillion
4. $31.25 trillion

Explanation: The formula to calculate real GDP is (Nominal GDP / GDP Deflator) x 100. Using the provided numbers: ($25 trillion / 125) x 100 =$0.2 trillion x 100 = $20 trillion.