Consider the effects of inflation in an economy composed of only two people: Larry, a bean...
Consider the effects of inflation in an economy composed of only two people: Larry, a bean farmer, and Megan, a rice farmer. Larry and Megan both always consume equal amounts of rice and beans. In 2016 the price of beans was $1, and the price of rice was $4.
Suppose that in 2017 the price of beans was $2 and the price of rice was $8.
Inflation was
.
Indicate whether Larry and Megan were better off, worse off, or unaffected by the changes in prices.
|
Better Off |
Worse Off |
Unaffected |
||
|---|---|---|---|---|
| Larry | ||||
| Megan |
Now suppose that in 2017 the price of beans was $2 and the price of rice was $4.80.
In this case, inflation was
.
Indicate whether Larry and Megan were better off, worse off, or unaffected by the changes in prices.
|
Better Off |
Worse Off |
Unaffected |
||
|---|---|---|---|---|
| Larry | ||||
| Megan |
Now suppose that in 2017, the price of beans was $2 and the price of rice was $1.60.
In this case, inflation was
.
Indicate whether Larry and Megan were better off, worse off, or unaffected by the changes in prices.
|
Better Off |
Worse Off |
Unaffected |
||
|---|---|---|---|---|
| Larry | ||||
| Megan |
What matters more to Larry and Megan?
The overall inflation rate
The relative price of rice and beans
Homework Answers
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