Consider an economy which produces and sells only two goods: apples and oranges. If the price of apples increases while the price of oranges remains constant, which of the following is most likely to happen to the nominal GDP of the economy, assuming quantities produced remain unchanged?

• A. Nominal GDP will increase
• B. Nominal GDP will remain unchanged
• C. Nominal GDP will decrease only if orange prices also decrease
• D. Nominal GDP will decrease

Answer: (A)

Verified step by step guidance

1. Recall that nominal GDP is calculated as the sum of the market value of all final goods and services produced in the economy, which can be expressed as: \(\text{Nominal GDP} = P_a \times Q_a + P_o \times Q_o\), where \(P_a\) and \(Q_a\) are the price and quantity of apples, and \(P_o\) and \(Q_o\) are the price and quantity of oranges.
2. Note that the problem states quantities produced (\(Q_a\) and \(Q_o\)) remain unchanged, so any change in nominal GDP must come from changes in prices (\(P_a\) or \(P_o\)).
3. Since the price of apples (\(P_a\)) increases and the price of oranges (\(P_o\)) remains constant, substitute these changes into the nominal GDP formula to see the effect: the term \(P_a \times Q_a\) increases, while \(P_o \times Q_o\) stays the same.
4. Because the quantity terms are fixed and the price of apples increases, the overall sum \(P_a \times Q_a + P_o \times Q_o\) must increase, leading to an increase in nominal GDP.
5. Therefore, the most likely outcome is that nominal GDP will increase when the price of apples rises and the price of oranges remains constant, assuming quantities do not change.