Consider the effects of inflation in an economy composed of only two people: Felix, a bean farmer, and Janet, a rice farmer. Felix and Janet both always consume equal amounts of rice and beans. In 2019 the price of beans was $5, and the price of rice was $3.
Suppose that in 2020 the price of beans was $10 and the price of rice was $6.
Inflation was _____%.
Indicate whether Felix and Janet were better off, worse off, or unaffected by the changes in prices.
Now suppose that in 2020 the price of beans was $7.50 and the price of rice was $6.
In this case, inflation was _____%.
Indicate whether Felix and Janet were better off, worse off, or unaffected by the changes in prices.
Now suppose that in 2020, the price of beans was $1.50 and the price of rice was $6.
In this case, inflation was _____%.
Indicate whether Felix and Janet were better off, worse off, or unaffected by the changes in prices.
What matters more to Felix and Janet?
The overall inflation rate
The relative price of rice and beans