Adjusting Nominal GDP for Inflation

Steps:

• Nominal GDP measures total output at current prices, including inflation effects.
• Real GDP measures output at constant prices to isolate volume changes.
• Use a price index like the GDP deflator to capture price level changes.
• Divide nominal GDP by the price index (multiplied by 100) to get real GDP.

Why B is correct:

• Changes in the price level, via the GDP deflator formula (Real GDP = Nominal GDP / (GDP Deflator / 100)), remove inflation's impact to show true economic growth.

Why the others are wrong:

• A: Exchange rates convert currencies for international comparisons, not domestic price adjustments.
• C: Interest rates influence investment and borrowing costs, unrelated to GDP price correction.
• D: Taxation affects government revenue and disposable income, not the conversion between nominal and real GDP.

Final answer: B