Imagine two economies. In one, economy A, technological improvements are rare, and the basket of goods and services that households consume is essentially unchanged from one year to the next. In the other economy, economy B, technology improves fast, and every year households consume goods and services that are better than those consumed the year before (or that did not even exist previously, e.g., new drugs). In both economies, during the year 2015, the government measured inflation to be 2%, and nominal incomes also increased by 2%.

a) According to the official inflation figures, real incomes increase by (Click to select)402-2% in economy A and by (Click to select)0-242% in economy B.

b) If government statisticians missed or understated quality changes, inflation was overstated in (Click to select)economy Bboth economiesneither economieseconomy A and the true improvement in living standards were understated in (Click to select)economy Bneither economiesboth economieseconomy A. References