Simpletown produces Apples and Robots. In Year 1, Simpletown harvested 1,000 apples and built 50 robots. During Year 2, Simpletown had identical production to Year 1. However, during Year 2, prices rose by 50%. Based on this information, which of the following is true?

• A. Simpletown's real GDP was higher in Year 2
• B. Simpletown's real GDP was lower in Year 2
• C. Simpletown's nominal GDP was higher in Year 1
• D. Simpletown's nominal GDP was lower in Year 1
• E. Both (a) and (d) are true

Answer: (D)

Verified step by step guidance

1. Understand the difference between nominal GDP and real GDP. Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation, while real GDP is adjusted for inflation, reflecting the true value of goods and services.
2. Identify the production levels for both years. In both Year 1 and Year 2, Simpletown produced 1,000 apples and 50 robots.
3. Recognize that the prices rose by 50% in Year 2. This means that the nominal GDP in Year 2 will be higher than in Year 1 due to the increase in prices, even though the quantity of goods produced remained the same.
4. Calculate the nominal GDP for both years. For Year 1, use the prices of apples and robots in Year 1. For Year 2, use the prices of apples and robots in Year 1, increased by 50%.
5. Determine the real GDP for both years. Since the production quantities are identical and real GDP is adjusted for inflation, the real GDP in Year 2 will be the same as in Year 1, indicating that the real GDP did not increase.