If real GDP declines in a given year, nominal GDP:

• A. is unaffected by changes in real GDP
• B. will always increase
• C. must also decline
• D. may increase, decrease, or remain unchanged depending on changes in the price level

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the difference between nominal GDP and real GDP. Nominal GDP measures the value of all final goods and services produced within a country in a given year using current prices, while real GDP measures the same output but adjusted for changes in the price level (inflation or deflation).
2. Step 2: Recognize that nominal GDP is calculated as the product of real GDP and the price level. Mathematically, this can be expressed as: \(\text{Nominal GDP} = \text{Real GDP} \times \text{Price Level}\).
3. Step 3: Analyze the scenario where real GDP declines. Since nominal GDP depends on both real GDP and the price level, a decline in real GDP alone does not determine the direction of nominal GDP.
4. Step 4: Consider the role of the price level. If the price level increases sufficiently (inflation), it can offset or even outweigh the decline in real GDP, causing nominal GDP to increase or remain unchanged.
5. Step 5: Conclude that nominal GDP may increase, decrease, or remain unchanged depending on how the price level changes relative to the change in real GDP.