Suppose nominal GDP increased in a given year. Based on this information, we know with certainty that:

A. real output has increased.

B. the price level (GDP deflator) has increased.

C. real output and the price level (GDP deflator) have both increased.

D. either real output or the price level (GDP deflator) have increased.

E. real output has increased and the price level has decreased.

D. either real output or the price level (GDP deflator) have increased.

Explanation:

GDP is the total value (price x quantity) of goods & services produced by an economy during an a time period.

Real GDP is calculated on the basis of base year price index. Nominal GDP is calculated on the basis of current year price index.

So: Real GDP increases only due to rise in output quantity, not by price. Nominal GDP can increase due to rise in both output quantity or in price level (reflected in deflator).

This makes Real GDP a better measure of Economic growth than Nominal GDP, since it captures effect of increased production only (& not price).

Deflator is a measure of average price level change =

Nominal GDP X 100

Real GDP

Deflator > 100 shows inflation in general price level, Deflator < 100 shows deflation in general price level.