Problem 7-09

Inflation is a general increase in prices and may be measured by the Consumer Price Index (CPI). Use Appendix A to answer the questions.

1. In Year 1 the CPI was 100; 20 years later, it was 230. What was the annual rate of inflation? Round your answer to the nearest whole number. %

2. Nancy and Pam both currently earn $110,000. If the annual rate of inflation is 5 percent, how much must each earn after eleven years to maintain their purchasing power? Round your answer to the nearest dollar. $

3. Your parents bought a home for $50,000 in Year 1 and sold it in Year 26 for $230,000. What was the annual rate of price increase over the 25 years? Round your answer to the nearest whole number. %

Interest Factors for the Future Value of One Dollar Time Period (e.g. year) 1 2 3 4 5 un AWN 1% 2% 3% 4% 5% 6% 7% 1.010 1.020 1.030 1040 1.050 1.060 1.070 1.020 1.040 1.061 1.082 1.102 1.124 1.145 1.030 1.061 1.093 1.125 1.158 1.191 1.225 1.041 1.082 1.126 1.170 1.216 1.262 1.311 1.051 1.104 1.159 1.217 1.276 1.338 1.403 8% 1.080 1.166 1.260 1.360 1.469 9% 1.090 1.188 1.295 1.412 1.539 10% 1.100 1.210 1.331 1.464 1.611 12% 1.120 1.254 1.405 1.574 1.762 14% 1.140 1.300 1.482 1.689 1.925 15% 1.150 1.322 1.521 1.749 2.011 16% 1.160 1.346 1.561 1.811 2.100 18% 1.180 1.392 1.643 1.939 2.288 20% 1.200 1.440 1.728 2.074 2.488 6 7 8 9 10 1.062 1.126 1.194 1.265 1.340 1.419 1.501 1.587 1.677 1.072 1.149 1.230 1.316 1.407 1.504 1.606 1.714 1.828 1.083 1.172 1.267 1.369 1.477 1.594 1.718 1.851 1.993 1.094 1.195 1.305 1.423 1.551 1.689 1.838 1.999 2.172 1.105 1.219 1.344 1.480 1.629 1.791 1.967 2.159 2.367 1.772 1.949 2.144 2.358 2.594 1.974 2.211 2.476 2.773 3.106 2.195 2.502 2.853 3.252 3.707 2.313 2.660 3.059 3.518 4.046 2.436 2.826 3.278 3.803 4.411 2.700 3.186 3.759 4.436 5.234 2.986 3.583 4.300 5.160 6.192 11 1.116 1.243 1.384 1.539 1.710 1.898 2.105 2.332 12 1.127 1.268 1.426 1.601 1.796 2.012 2.252 2.518 13 1.138 1.294 1.469 1.665 1.886 2.133 2.410 2.720 14 1.149 1.319 1.513 1.732 1.980 2.261 2.579 2.937 15 1.161 1.346 1.558 1.801 2.079 2.397 2.759 3.172 2.580 2.813 3.066 3.342 3.642 2.853 3.138 3.452 3.797 4.177 3.479 3.896 4.363 4.887 5.474 4.226 4.652 5.117 6.176 4.818 5.350 5.936 7.287 5.492 6.153 6.886 8.599 6.261 7.076 7.988 10.147 7.138 8.137 9.266 11.973 7.430 8.916 10.699 12.839 15.407 16 17 18 19 20 1.173 1.373 1.605 1.873 2.183 2.540 2.952 3.426 3.970 1.184 1.400 1.653 1.948 2.292 2.693 3.159 3.700 4.328 1.196 1.428 1.702 2.026 2.407 2.854 3.380 3.996 4.717 1.208 1.457 1.754 2.107 2.527 3.026 3.617 4.316 5.142 1.220 1.486 1.806 2.191 2.653 3.207 3.870 4.661 5.604 4.595 6.130 8.137 9.358 10.748 14.129 5.054 6.866 9.276 10.761 12.468 16.672 5.560 7.690 10.575 12.375 14.463 19.673 6.116 8.613 12.056 14.232 16.777 23.214 6.728 9.646 13.743 16.367 19.461 27.393 18.488 22.186 26.623 31.948 38.337 25 1.282 1.641 2.094 2.666 3.386 4.292 5.427 6.848 8.623 10.835 17.000 26.462 32.919 40.874 62.688 95.396 30 1.348 1.811 2.427 3.243 4.322 5.743 7.612 10.063 13.268 17.449 29.960 50.950 66.212 85.850 143.370 237.370