5. Problems and Applications Q5 Consider the effects of inflation in an economy

Question

5. Problems and Applications Q5 Consider the effects of inflation in an economy composed of only two people: Felix, a bean farmer a rice farmer. Felix and Janet both always consume equal amounts of rice and beans. In and Janet, 2016 the price of beans was $5, and the price of rice was $3. Suppose that in 2017 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. Better Off Worse Off Unaffected Felix Janet Now suppose that in 2017 the price of beans was $7.50 and the price of rice was $6. In this case, inflation was Indicate whether Folix and Janet were better off, worse off, or unaffected by the changes in prices Better Off Worse off Unaffected Felix danet Now suppose that in 2017, 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 unaffectod by the chanpes in prices Detter off Worse Off Unaffected Felix anet wmat matters more to Felix and Janet? The relative price of rice and beans The dverall inflition ratc

Explanation / Answer

Inflation was 100% because price of both commodities doubles.

Both the farmer,Felix and Janet will be unaffected because their real income is same.

When price of beans=7.5 and price of rice=6

Inflation=13.5/8*100-100=68.5%

In this case Felix, beans farmer is worse off whereas Janet a rice farmer is better off.

When Price of beans=1.5 and rice price=6 the inflation=7.5/8*100-100=-6.25

Felix is worse off whereas Janet is better off.

The relative price matters because it changes the real income.

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