Questions 6 and 7 pertain to the following situation. In July of 1976, I took a

Question

Questions 6 and 7 pertain to the following situation. In July of 1976, I took a job as an aeronautical engineer at MITRE Corporation at an annual salary of $18, 300. Use the consumer price index to measure inflation. The consumer price index was 55.9 in March of 1976 and 238.132 in March of 2016. This means that goods and services which cost $55.90 in March of 1976 cost $238.13 in March of 2016. Based on the Consumer Price Index, calculate the average rate of inflation over the 40 year period from March of 1976 to March of 2016. Assume discrete compounding; i.e. F = P(1 + i)^n. Round your answer to the nearer thousandth of a percent (i.e. n.nnn%).

Explanation / Answer

Calulation of Average Annual Inflation Rate F= P(1+i)n Where, F= Future Value               P= Principal Value               i=Rate of Interest              n=Time Period Assumption: Here we assumed that interest is annually compounding Solution, 238.13 = 55.9(1+i)40 (1+i)40 = 4.2599         i = 4.25990.025 -1         i = 1.036895- 1         i = 0.036895 or    i = 3.6895 %

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