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what is the annual multiplier of a yearly increase of 5% due to inflation?

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user8860269 | eNotes Newbie

Posted April 16, 2013 at 12:42 AM via web

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what is the annual multiplier of a yearly increase of 5% due to inflation?

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mariloucortez | High School Teacher | (Level 3) Adjunct Educator

Posted April 16, 2013 at 1:55 AM (Answer #1)

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If infaltion is involved, the future value of money is given by:

`F = P(1+i)^-1`

where i is the annual interest

          P is the present value

So to get the multiplier,

`(1+i)^-1 = (1+0.05)^-1`

                `= 20/21 = 0.9524`

Rounded to decimal places. Remember that, during inflation the value of money decreases while the value of goods increases.

Thus, the answer is `20/21 or 0.9524.`

   

 

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