Question 8 If you wanted to measure whether the output of an economy was increasing or decreasing across time periods, you would us the real GDP data rather than the nominal GDP data because (1) real GDP reflects the impact of transfer payments on the economy, but nominal G. does not. (3) real GDP incorporates the impact of federal budget deficits and surpluses; nominal GDP does not. (4) real GDP adjusts for changes in the general level of prices, but nominal GDP does not.

The correct answer is: **(4) Real GDP adjusts for changes in the general level of prices, but nominal GDP does not.** **Explanation:** - **Real GDP vs. Nominal GDP:** - **Nominal GDP** measures the value of all final goods and services produced in an economy using current prices during the time of measurement. It does not account for changes in the price level or inflation. - **Real GDP**, on the other hand, adjusts for changes in the price level by using constant prices from a base year. This adjustment allows for a more accurate comparison of economic output over different time periods by isolating the effect of price changes. - **Why Use Real GDP for Measuring Economic Output Over Time:** - **Inflation Adjustment:** By adjusting for inflation, real GDP provides a clearer picture of whether the economy is genuinely growing (in terms of actual production and services) or if the observed growth is merely due to rising prices. - **Policy and Analysis:** Policymakers and economists prefer real GDP when analyzing economic performance, making decisions, and forecasting future economic conditions. - **Why the Other Options Are Incorrect:** - **(1) Real GDP and Transfer Payments:** Real GDP does not directly reflect the impact of transfer payments. Transfer payments (like social security or unemployment benefits) are part of government expenditures but are not included in GDP calculations. - **(3) Real GDP and Federal Budget Deficits/Surpluses:** While federal budget deficits and surpluses affect the overall economy, real GDP primarily focuses on the production of goods and services and is not a direct measure of budgetary balances. **Conclusion:** To accurately measure the true growth or contraction of an economy over time, adjusting for price changes is essential. Real GDP provides this adjustment, making it the preferred metric over nominal GDP for assessing economic output across different periods. **Answer:** Option (4): real GDP adjusts for changes in the general level of prices, but nominal GDP does not.