1.You are paying a series of five constant-dollar (or real-dollar) uniform payme
ID: 1216435 • Letter: 1
Question
1.You are paying a series of five constant-dollar (or real-dollar) uniform payments of $2374.47 beginning at the end of first year. Assume that the general inflation rate is 18.81% and the market interest rate is 18.81% during this inflationary period.
2.As reported by the Bureau of Labor Statistics, the CPI for Airfare in 2263 was 597.8 (using a base year of 1914 = 100). The CPI for Airfare in 2264 was 608.6. Based on this data, what was the inflation rate of airfare from 2263 to 2264?
3.An economist has predicted 8.1% inflation during the next 11.0 years. How much will an item that presently sells for $16.0 bring 11.0 years later?
Explanation / Answer
Answer 1. Real interest rates = Nominal interest rate - Inflation rate = 18.81% - 18.81% = 0%.
Answer 2. Inflation rate from 2263 to 2264 = [{608.6 - 597.8} / 597.8] *100 = 1.80%
Answer 3. If inflation rate during the next 11 year will be 8.1%, then the value of item after 11 years will be (by compund interest formula)
A = P (1 + r/n)t
=> Value = 16(1 + 0.081)11 => $37.68
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