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Overall inflation rate-relative price

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Let's consider the effects of inflation in an economy composed of only two people: Bob, a bean farmer and Rita, price farmer. Bob and Rita both always consume equal amounts of rice and beans. In 2013, the price of beans was $1 and the price of rice is $3.

-Suppose that in 2014 the price of beans was $2 and the price of rice was $6. What was the inflation? Was Bob better off, worse off, or unaffected by the changes in prices? What about Rita?

-Now suppose that in 2014 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?

-Finally, supposed that in 2014 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?

-What matters more to Bob and Rita -- the overall inflation rate or the relative price if the rice and the beans?

Reference no: EM132601248

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