Question

A real (or constant) dollar value can be calculated by dividing the nominal (unadjusted or current dollar) value by the ____________ for that year.

a) inflation rate
b) GDP growth rate
c) price index (decimal shifted)
d) any of the above

Answer 1

Answer:

(C) price index (decimal shifted)

Explanation:

A real dollar value can be calculated as follows:

Real Dollar Value = $\frac{Norminal Dollar Value}{Price Index}$.

The price index is an adjustment figure that is computed as (the price in the current year) divided by (the price in a base year). Thus the price index expresses the price in the current year in relative terms to $1 in the base year. As such, if the price index in the current year is 1.25, it means current year prices are 25% more expensive that they were in the base year.