Let’s consider the effects of inflation in an economy composed of 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 2019, the price of beans was $1 and the price of rice was $3.

a. Suppose that in 2020 the price of beans was $2 and the price of rice was $6. What was inflation? Did the price changes leave Bob better off, worse off, or unaffected? What about Rita?

b. Now suppose that in 2020 the price of beans was $2 and the price of rice was $4. What was inflation? Did the price changes leave Bob better off, worse off, or unaffected? What about Rita?

c. Finally, suppose that in 2020 the price of beans was $2 and the price of rice was $1.50. What was inflation? Did the price changes leave Bob better off, worse off, or unaffected? What about Rita?

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