Quiz 4: Equivalence Calculations Under Inflation

Business

Rate of inflation: Average cost of a gallon gasoline was $1.1 in 1996 which increased to $4.12 in 15 years; hence, the rate of inflation can be calculated as follows: img …… (1)Where, P = Present worth F = Future worth f = Rate of inflation N = Number of years Substitute the respective values in Equation (1) to obtain the rate of inflation. img Hence, the rate of inflation is img percent. Price index in the year 2011: Price index can be calculated as follows: img Price index in the year 2011 is img .

Rate of inflation: Rate of inflation is 6 percent; hence, number of years required for a dollar ($) to fall in its purchasing power to $1.5 can be calculated as follows: img …… (1)Where, P = Present worth F = Future worth f = Rate of inflation N = Number of years Time period: Rate of inflation is 6 percent; hence, number of years required for a dollar ($) to fall in its purchasing power to one half can be calculated as follows: img img Hence, a dollar requires img years to fall its purchasing power to one half. Option (d) is correct.

Rate of inflation: Average cost of a gallon gasoline $0.99 in 1998 increased to $3.00 in 2011; hence, the rate of inflation can be calculated using the formula as below: img …… (1)Where, P = Present worth F = Future worth f = Rate of inflation N = Number of years Substitute the respective values in Equation (1) to obtain the rate of inflation. img Hence, the rate of inflation is img .