True or false: An increase in nominal GDP will always result in increases in real GDP.  Increases in a positive GDP gap are associated with increases in the unemployment rate.

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It is false to say that an increase in nominal GDP will always lead to a rise in the real GDP. The reason for this outcome is that inflation rates affect the real GDP, not the quantity produced. Thus, it's possible to have a scenario where the nominal GDP has increased, but the real GDP hasn't changed or is lower. For example, the quantity of corn produced this year might be higher than last year. However, the selling price of corn can also be higher this year. It means that you can buy less corn at the current price than you did last year. Hence, the real GDP might lessen due to a decrease in household spending.

It is false to say that increases in a positive GDP are associated with a rise in unemployment levels. In fact, it's the exact opposite: a rise in a positive GDP gap shows improvement in the levels of employment because it's an indicator of a healthy economy. A positive output gap is brought about by an increase in the demand for goods and services. Firms will hire more people to serve customers better and meet the excess demand by providing the goods on time.

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Both of these statements are false.  Nominal GDP is simply the market value of all final goods and services produced in a given country in a given year.  This means that nominal GDP can go up just because prices go up, even if the country does not actually produce more things than it did in the previous year.  Real GDP takes inflation into account.  Thus, if there is inflation, nominal GDP can go up even as real GDP remains the same or drops.  This is not common, but it is possible.

When you have a positive GDP gap, you actually have inflation, not unemployment.  A positive GDP gap means that the economy is producing more than it can sustain in the long run.  Clearly, a country could not be producing “too much” if it had high unemployment.  As the size of the positive GDP gap increases, you would get more inflation and less unemployment.

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