HW8_inflation_key

# HW8_inflation_key - Homework 8: Inflation 1. Students at a...

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1 1 Homework 8: Inflation 1. Students at a private university in the Midwest United States have been complaining about tuition increases. The data shows the tuition for the years 1994 through 2004. The students note a 68% increase from the tuition in 1994 to the tuition in 2004. We have also included a column that shows the CPI for those years. Year Actual Tuition CPI Real Tuition Base 1994 Real Tuition Base 2004 0 1994 \$15,700 156.50 1 1995 \$16,300 161.23 2 1996 \$17,100 165.56 3 1997 \$17,800 169.51 4 1998 \$18,400 173.38 5 1999 \$19,200 176.98 6 2000 \$20,100 181.29 7 2001 \$21,000 186.13 8 2002 \$22,500 190.44 9 2003 \$24,100 193.22 10 2004 \$26,500 196.63 10 year Increase % Escalation rate % (For parts a and b, to find the real tuition for year n , multiply the actual tuition for year n by the ratio of the CPI for the base year to the CPI for year n .) a. Compute the real tuition based on the prices of 1994. b, Compute the real tuition based on the prices of 1994. c. For each column compute the ten-year increase and the average annual escalation rate. The actual escalation rate is the escalation rate of the actual tuition column. The real rate is the escalation rate of the real tuition column. The rate for both real tuition columns should be the same. The general inflation rate is the escalation rate of the CPI column. d. Demonstrate that: actual escalation rate = real rate + general inflation rate + real rate*general inflation rate. e. Considering inflation, do the students have a valid argument?

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2 2 Real Tuition Real Tuition Year Tuition CPI Base 1994 Base 2004 0 1994-95 \$15,700 156.50 \$15,700 \$19,725 1 1995-96 \$16,300 161.23 \$15,822 \$19,879 2 1996-97 \$17,100 165.56 \$16,164 \$20,309 3 1997-98 \$17,800 169.51 \$16,434 \$20,648 4 1998-99 \$18,400 173.38 \$16,608 \$20,866 5 1999-00 \$19,200 176.98 \$16,979 \$21,332 6 2000-01 \$20,100 181.29 \$17,351 \$21,800 7 2001-02 \$21,000 186.13 \$17,657 \$22,185 8 2002-03 \$22,500 190.44 \$18,490 \$23,231 9 2003-04 \$24,100 193.22 \$19,520 \$24,525 10 2004-05 \$26,500 196.63 \$21,092 \$26,500 D0 \$15,700 \$157 \$15,700 \$19,725 D10 \$26,500 \$197 \$21,092 \$26,500 D10/D0 1.69 1.26 1.34 1.34 10 yr increase 68.79% 25.64% 34.35% 34.35% Esc. Rate 5.37% 2.31% 3.00% 3.00% real rate(%)= 3.00% infl. rate(%)= 2.31% Actual rate(%) 5.37% Actual escalation rate = real rate + inflation rate + real rate*inflation rate
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## This note was uploaded on 05/13/2010 for the course ME 01953 taught by Professor Bard during the Spring '10 term at University of Texas.

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HW8_inflation_key - Homework 8: Inflation 1. Students at a...

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