Difficulty: Medium

Average Score: 64%

If all resources were equally productive the PPC would be:

Rationale

Real GDP in year 10 is $10 trn.

To calculate Real GDP, the formula is Nominal GDP divided by the price index (in decimal form). In this case, $15 trillion divided by 1.5 (150/100) equals $10 trillion, reflecting the economy's output adjusted for inflation.

A (vertical line) YOUR ANSWER

This option represents the nominal GDP before adjusting for inflation. Real GDP accounts for changes in price levels, and thus simply stating the nominal figure does not reflect the true economic output in constant dollars.

B (horizontal line) YOUR ANSWER

This is the correct answer. By dividing the nominal GDP of $15 trillion by the price index of 150, we convert the nominal value into real terms, resulting in $10 trillion. This value accurately reflects the economy's production output without the effects of inflation.

C (positively sloped straight line) YOUR ANSWER

This figure incorrectly assumes that the nominal GDP is inflated rather than adjusted for the price index. It appears to be the result of a misunderstanding of the calculation, possibly multiplying rather than dividing the nominal GDP by the price index.

D (negatively sloped straight line) CORRECT

This option also results from an incorrect calculation. It may stem from a misinterpretation of how to apply the price index, possibly involving an incorrect division or subtraction, leading to an underestimation of the Real GDP.

Conclusion

Real GDP is a critical measure that adjusts nominal GDP for changes in price levels, allowing for a more accurate reflection of economic performance. In this scenario, the adjustment reveals that the Real GDP is $10 trillion, demonstrating the economy's output in constant dollars. Understanding this distinction is vital for analyzing economic data effectively.

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