Consider the effects of inflation in an economy composed of only two people: Manuel, a bean farmer, and Poornima, a rice farmer. Manuel and Poornima both always consume equal amounts of rice and beans. In 2019 the price of beans was $1, and the price of rice was $4.
Suppose that in 2020 the price of beans was $2 and the price of rice was $8.
Inflation was
100%
.
Indicate whether Manuel and Poornima were better off, worse off, or unaffected by the changes in prices.
Better Off
Worse Off
Unaffected
Manuel
Poornima
Now suppose that in 2020 the price of beans was $2 and the price of rice was $4.80.
In this case, inflation was
%
.
Indicate whether Manuel and Poornima were better off, worse off, or unaffected by the changes in prices.
Better Off
Worse Off
Unaffected
Manuel
Poornima
Now suppose that in 2020, the price of beans was $2 and the price of rice was $1.60.
In this case, inflation was
%
.
Indicate whether Manuel and Poornima were better off, worse off, or unaffected by the changes in prices.
Better Off
Worse Off
Unaffected
Manuel
Poornima
What matters more to Manuel and Poornima?
The relative price of rice and beans
The overall inflation rate
