Question 2: [1 point] In 2000, most cell phones had black and white screens. By

Question

Question 2: [1 point] In 2000, most cell phones had black and white screens. By 2005, almost all cell phones had color screens and a built-in camera. The CPI basket did not capture this change in cell phone features. Which CPI bias does this event most closely relate to?

Question 3: Suppose that a borrower and a lender agree on the terms of a car loan. Six months later, inflation numbers are announced and inflation turns out to be higher than expected.

[1 point] Does the lender gain or lose from the unexpectedly high inflation?

[1 point] Does the borrower gain or lose from the unexpectedly high inflation?

Explanation / Answer

a) New product bias. New products introduced in the market as not made a part of the index unless they become very common in the market and the price decrease goes unnoticed in the market. this is called new product bias.

b) i) the lender will lose from the unexpected increase in the inflation. As inflation tends to transfer the wealth from the lender to the borrower and the purchasing power of the currency decrease.

ii) the borrower will gain from the unexpectedly high inflation.  

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