Chapter 11, Problem 1P

To determine

Calculate the inflation rate.

Explanation of Solution

Time period is denoted by n, interest rate is denoted by i, and inflation rate is denoted by f.

Inflation rate can be calculated as follows.

$\begin{array}{c}{\text{Price}}_{\text{Present}}{\left(1+\text{f}\right)}^{\text{n}}={\text{Price}}_{\text{Present}}\left(1+{\text{Price}}_{\text{Increasing rate 1}}\right)\left(1+{\text{Price}}_{\text{Increasing rate 2}}\right)\left(1+{\text{Price}}_{\text{Increasing rate 3}}\right)\\ 3.5{\left(1+\text{f}\right)}^3=\text{3}\text{.5}\left(1+0.04\right)\left(1+0.06\right)\left(1+0.08\right)\\ \text{f}=0.059874\end{array}$

Inflation rate is 5.9874%.