The Drawback to Calculating Real GDP Using Base Year Prices

question 20

Multiple Choice

The drawback to calculating real GDP using base year prices is that:

• A)real GDP in one year is not comparable to real GDP in another year.
• B)relative prices change over time and these are not reflected in base year prices, which distorts GDP.
• C)relative prices change over time and these changes are reflected in base year prices.
• D)quality changes are reflected in base year prices.

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Definitions:

Aggregate Demand

The total demand for all goods and services within an economy at a given overall price level and within a given time period.

Money Supply

The total fund of money available in an economy at a fixed point in time.

Interest Rate

The cost of borrowing money, expressed as a percentage of the amount borrowed, paid by the borrower to the lender for the use of their funds.

Aggregate Demand

The comprehensive demand for every type of good and service within an economy, identified at a given price level and time period.