Consider the effects of inflation in an economy composed of only two people: Sam, a bean farmer, and Teresa, a rice farmer. Sam and Teresa both always consume equal amounts of rice and beans. In 2016 the price of beans was $1, and the price of rice was $3.
Suppose that in 2017 the price of beans was $2 and the price of rice was $6.
Inflation was:
Indicate whether Sam and Teresa were better off, worse off, or unaffected by the changes in prices.
Better Off |
Worse Off |
Unaffected |
||
---|---|---|---|---|
Sam | ||||
Teresa |
Now suppose that in 2017 the price of beans was $2 and the price of rice was $4.50.
In this case, inflation was:
Indicate whether Sam and Teresa were better off, worse off, or unaffected by the changes in prices.
Better Off |
Worse Off |
Unaffected |
||
---|---|---|---|---|
Sam | ||||
Teresa |
Now suppose that in 2017, the price of beans was $2 and the price of rice was $1.50.
In this case, inflation was:
Indicate whether Sam and Teresa were better off, worse off, or unaffected by the changes in prices.
Better Off |
Worse Off |
Unaffected |
||
---|---|---|---|---|
Sam | ||||
Teresa |
What matters more to Sam and Teresa?
The relative price of rice and beans
The overall inflation rate
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