Question

The inflation rate in the U.S. in 2015 was about 0.7% (that is, prices in the U.S. increased about 0.7% on average from December 2014 to December 2015), the inflation rate in 2016 was about 2%, and the inflation rate in 2017 was about 2.1%.

a) If an automobile cost $35,000 at the end of 2014, what would the price of that automobile be in 2015 dollars (i.e., at the end of 2015)? In 2016 dollars? In 2017 dollars? (Assume that the price of the automobile increases at the rate of inflation every year.)

b) If a bicycle cost $700 in 2015, what is the price of that bicycle in 2014 dollars? In 2016 dollars? In 2017 dollars? (Again, assume the price of the bicycle increases at the rate of inflation every year.)

c) If a cruise cost $2,200 in 2016, what is the price of that cruise in 2015 dollars? In 2014 dollars? In 2017 dollars? (Again, assume the price of the cruise increases at the rate of inflation every year.)

Answer 1

(a)

Price of automobile in 2015 dollars ($) = 35,000 x 1.007 = 35,245

Price of automobile in 2016 dollars ($) = 35,245 x 1.02 = 35,949.90

Price of automobile in 2017 dollars ($) = 35,949.90 x 1.021 = 37,704.85

(b)

Price of bicycle in 2014 dollars ($) = 700 / 1.007 = 695.13

Price of bicycle in 2016 dollars ($) = 700 x 1.02 = 714

Price of bicycle in 2017 dollars ($) = 714 x 1.021 = 728.99

(c)

Price of cruise in 2015 dollars ($) = 2,200 / 1.02 = 2,156.86

Price of cruise in 2014 dollars ($) = 2,156.86 / 1.007 = 2,141.87

Price of cruise in 2017 dollars ($) = 2,200 x 1.021 = 2,246.20