# Calculating Inflation rates

• Mar 2nd 2010, 04:53 PM
krzyrice
Calculating Inflation rates
In a country where inflation is a concern, prices have risen by 40% over a 5-year period.

a) By what percent do the prices rise each year?
b) How long does it take for prices to rise by 5%?

So how would I start out this problem? When it says inflation that means the prices are going up.

Should I use this formula:
P0e^k*t = P0
e^k*5 = 1.4 to solve and find the answer to a?

If so then should the answer to a) be 0.067294447 or 6.7294447%?

Also for b) should the set up be like this?
1(1.067294447)^t = 1.05? Solve for t
If so should the answer to b) be 0.749155419?

• Mar 3rd 2010, 06:36 AM
HallsofIvy
Quote:

Originally Posted by krzyrice
In a country where inflation is a concern, prices have risen by 40% over a 5-year period.

a) By what percent do the prices rise each year?
b) How long does it take for prices to rise by 5%?

So how would I start out this problem? When it says inflation that means the prices are going up.

Should I use this formula:
P0e^k*t = P0
e^k*5 = 1.4 to solve and find the answer to a?

Inflation acts like "compounding continuously" so that would be correct.

Quote:

If so then should the answer to a) be 0.067294447 or 6.7294447%?
If you are asking "which", the problem say "By what percent" so the second is correct.

Quote:

Also for b) should the set up be like this?
1(1.067294447)^t = 1.05? Solve for t
If so should the answer to b) be 0.749155419?
No, you should use the formula you used to get .06729447:
[tex]e^{.06729447 t}= 1.05.

Quote: