Problema Solution
If the rate of inflation averages r per anum over n years, the amount A that $P will purchase after n years is A=P(1-r)^n, where r is expressed as a decimal
If the amount that $1500 will purchase is only $1300 after 6 years, what was the average inflation rate?
Answer provided by our tutors
P = $1,500
A = $1,300
n = 6 years
r = rate of inflation as a decimal
A = P(1 - r)^n
1500(1 - r)^6 = 1300
(1 - r)^6 = 1300/1500
r = 0.0236 or 2.36%
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the average inflation rate was 2.36%.