7. Let's consider the effects of inflation in an economy comprising only two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal amounts of rice and beans. In year 2015, the price of beans was $1, and the price of rice was $3.

a. Suppose that in 2016 the price of beans was $2 and the price of rice was $6. What was inflation? Was Bob better off, worse off, or unaffected by the changes in prices? What about Rita?

b. Now suppose that in 2016 the price of beans was $2 and the price of rice was $4. What was inflation? Was Bob better off, worse off, or unaffected by the changes in prices? What about Rita?

c. Finally suppose that in 2016 the price of beans was $2 and the price of rice was $1.50. What was inflation? Was Bob better off, worse off, or unaffected by the changes in prices? What about Rita?

d. What matters more to Bob and Rita—the overall inflation rate or the relative price of rice and beans?