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5 . Problems and Applications Q5

Consider the effects of inflation in an economy composed of only two people: Kevin, a bean farmer, and Maria, a rice farmer. Kevin and Maria both always consume equal amounts of rice and beans. In 2019 the price of beans was $1, and the price of rice was $3.

Suppose that in 2020 the price of beans was $2 and the price of rice was $6.

Inflation was.

Indicate whether Kevin and Maria were better off, worse off, or unaffected by the changes in prices.

Better Off

Worse Off

Unaffected

Kevin

Maria

Now suppose that in 2020 the price of beans was $2 and the price of rice was $4.50.

In this case, inflation was.

Indicate whether Kevin and Maria were better off, worse off, or unaffected by the changes in prices.

Better Off

Worse Off

Unaffected

Kevin

Maria

Now suppose that in 2020, the price of beans was $2 and the price of rice was $1.50.

In this case, inflation was.

Indicate whether Kevin and Maria were better off, worse off, or unaffected by the changes in prices.

Better Off

Worse Off

Unaffected

Kevin

Maria

What matters more to Kevin and Maria?

The overall inflation rate

The relative price of rice and beans