Distinguishing Nominal from Real Output Using CPI

Steps:

• Nominal output rose from 100 to 110, a 10% increase.
• CPI rose from 100 to 120, indicating 20% inflation.
• Compute 2015 real output in 2014 prices: 110 × (100/120) = 91.67.
• Real output fell from 100 to 91.67.

Why C is correct:

• Real output measures production adjusted for inflation using the formula: Real = Nominal × (Base CPI / Current CPI); this shows a decline.

Why the others are wrong:

• A: Nominal output increased by 10%, did not decrease.
• B: Describes nominal (money) output increase, ignores inflation.
• D: Real output decreased, did not increase.

Final answer: C