Question

Problems and applications q5 consider the effects of inflation in an economy composed of only two people: gilberto, a bean farmer, and juanita, a rice farmer. gilberto and juanita both always consume equal amounts of rice and beans. in 2016 the price of beans was $1, and the price of rice was $4. suppose that in 2017 the price of beans was $2 and the price of rice was $8.

Answer 1

Answer:

1) If they both consume the same amount of goods (rice and beans), and their price increased by 100%, then the inflation rate is 100%.

• old price of beans = $1, new price $2, inflation rate 100%
• old price of rice = $4, new price $8, inflation rate 100%

The inflation rate measures the change in the general price level of an economy during a certain period of time, in this case during a year from 2016 to 2017.

2) Indicate whether Gilberto and Juanita were better off, worse off, or unaffected by the changes in prices.

Since Gilberto produces beans and Juanita produces rice, and the price of both of their products increase equally (100%), then the inflation rate will not affect them. Their consumption levels also remain the same, no one decided to consume more of one product and less of the other.