If National Income Accountants Fail to Make an Adequate Adjustment

question 91

Multiple Choice

If national income accountants fail to make an adequate adjustment for increases in the quality of goods and services over time,

• A) real GDP will overstate the growth rate of real output.
• B) the GDP deflator will underestimate inflation.
• C) the GDP deflator will overestimate inflation.
• D) real GDP will overstate the growth of real output, and the GDP deflator will understate inflation.

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Definitions:

Capital Intensity Ratio

A measure of how much capital is used in production, often expressed as the ratio of total assets to sales revenue.

Full Capacity

The maximum level of production or output that a facility can achieve under normal operating conditions.

Operating Capacity

The maximum output a company can produce under normal working conditions.

Earnings Retention Ratio

The proportion of net income that a company retains to reinvest in its business rather than distributing it to shareholders as dividends.