Question

Since 1972 the US. inflation rate has averaged 4.8 % per year . Use the approximate doubling time formula to estimate the doubling time of prices caused by inflation.

Answer 1

14 3/4 years

Explanation:

Let's assume compound inflation. The appropriate formula for that is:

A = P(1 + r)^t.

If we represent current prices by P, then double that would be 2P:

2P = P(1 + 0.048)^t Find t, the time required for prices to double.

Then:

2 = 1.048^t

Taking the natural log of both sides, we get:

ln 2 = t·ln 1.048, so that:

t = (ln 2) / (ln 1.048) = 14.78

At 4.8 inflation, with annual compounding, prices will double in approx. 14 3/4 years.