Chapter 12, Problem 5PA

### Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

Chapter
Section

### Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

# Let’s consider the effects of inflation in an economy composed of only two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal amounts of rice and beans. In 2016, the price of beans was $1 and the price of rice was$3.a. Suppose that in 2017 the price of beans was $2 and the price of rice was$6. What was inflation? Was Bob better off, worse off, or unaffected by the changes in prices? What about Rita?b. Now suppose that in 2017 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?c. Finally, suppose that in 2017 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?d. What matters more to Bob and Rita—the overall inflation rate or the relative price of rice and beans?

Subpart (a):

To determine

Relative price and inflation.

Explanation

When the price of beans in 2017 is $2 and rice is$6, the inflation rate in year 2017 is calculated as follows:

InflationĀ rate=PriceĀ ofĀ ofĀ oneĀ unitĀ ofĀ goods2017āPriceĀ ofĀ ofĀ oneĀ unitĀ ofĀ goods2016PriceĀ ofĀ ofĀ oneĀ unitĀ ofĀ goods2016Ć100=(2+6

Subpart (b):

To determine

Relative price and inflation.

Subpart (c):

To determine

Relative price and inflation.

Subpart (d):

To determine

Relative price and inflation.

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