Question

Consider the effects of inflation in an economy composed of only two people: Sam, a bean...

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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