POP Quiz Inflation

# POP Quiz Inflation - cost of a red tape cutting machine is...

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ISE 311 POP Quiz –Lavelle, Spring 2009 YOUR NAME HERE (please print): This is an OPEN BOOK, CLOSED NEIGHBOR Pop Quiz. Please put all work on this paper (use the back if necessary). (1) The cost of a first-class postage in 1970 was \$0.06 and the cost of postage in year 2007 is \$0.41. Determine the average inflation rate over the years. (2) If the market interest rate is 16% and the inflation rate is 10%, determine the real interest rate. You may use the approximation discussed in class. (3) To convert actual dollars at time-five into real base-zero dollars at the same point in time, it is necessary to _________. A. divide by (1+ i)^5 B. divide by (1+ f)^5 C. divide by (1 + f)^0 D. multiple by (1+ f)^5 (4) What amount must be deposited into a savings account that pays 8% interest if the general inflation rate is 10% and you want to set aside enough money to purchase a red tape cutting machine ten years after the deposit? The current

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Unformatted text preview: cost of a red tape cutting machine is \$10,000 (NOTE: the cost of red tape cutting machines increase at the same rate as the general inflation rate). (Please use back of this page for work) Chapter 14, POP Quiz Solution ISE 311 – Lavelle (#1) Number of years between 1970 and 2007 = 37 Present Value = 0.06; Future Value = 0.41 .41 = .06(1+f)^37 (1 + f )^37= .41/.06 f=0.0533 or 5.33% The answer is “B” (#2) Using the approximation i(market) = inflation rate + real rate 16=10+i(real)l thus i(real)=6% (#3) R\$ = A\$(P/F,i%,n); this strips out inflation for n periods Since multiplying by (P/F,i%,n) = dividing by (1+f)^n The answer is “B” (#4) Deposit =? f = 10% i = 8% n = 10 Years Initial cost = \$10,000 Future price = P (F/P, f, n) = 1 , ( F / P , 1 % , 1 ) = 10,000(2.5940) = \$25,940 Present worth = Future price (P/F, i, n) = 25,940(P/F, 8%, 10) = 25,940(0.4632) =\$12,015.41...
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## This note was uploaded on 12/08/2010 for the course ISE 311 taught by Professor Bernhard during the Spring '10 term at N.C. State.

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POP Quiz Inflation - cost of a red tape cutting machine is...

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