Principles of Economics- Mankiw (5th) 633

Principles of Economics- Mankiw (5th) 633 - CHAPTER 28 M O...

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CHAPTER 28 MONEY GROWTH AND INFLATION 653 7. Let’s consider the effects of inflation in an economy composed only of two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal amounts of rice and beans. In 2000, the price of beans was $1, and the price of rice was $3. a. Suppose that in 2001 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 2001 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 2001 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? 8.
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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