Question

Consider the diagram below, and answer the following questions.

a. What is the base year? Explain.

b. Has this country experienced inflation or deflation since the base year? How can you tell?

Short answer

a. the base year is 2011.

b. It is correct. The country experienced inflation or deflation since the base year.

Step-by-step solution

Introduction

• The rate at which prices grow over time is referred to as inflation. Inflation is typically described as a broad measure of price changes or increases in a country's cost of living.
• Deflation happens when a country's total price levels fall, whereas inflation happens when prices rise.
• Deflation can be caused by a boost in productivity, a decline in overall demand, or a fall in the quantity of credit available in the economy.

Explanation Part (a)

• The graph shows that 2011 is the starting point.
• The nominal GDP was lower than the real GDP between 2011 and 2016.
• This demonstrates how the situation has affected the entire country.
• The current year's price index was lower than the base year's index.

Explanation Part (b)

• Between 2011 and 2016, the economy experienced deflation.
• Genuine GDP and nominal GDP were equal in 2016 for the first time.
• After 2016, there is a substantial increase in nominal GDP, implying that the economy is expanding but true GDP is decreasing.
• It's important to remember that as nominal GDP rises, so does yearly GDP.