28.03.2023 - 17:13

It is known that the inflation rate over next three years is expected to be 5% in the first year, 10% in the second and 15% in the third. In such a case, average expected annual inflation rate is?It i

It is known that the inflation rate over next three years is expected to be 5% in the first year, 10% in the second and 15% in the third.

In such a case, average expected annual inflation rate is?

Answers (1)
  • atlas
    April 7, 2023 в 18:29

    To calculate the average expected annual inflation rate over the next three years, we can use the formula for the compound annual growth rate (CAGR), which takes into account the annual rates of inflation over multiple years.

    The formula for CAGR is: [(Ending Value / Beginning Value)^(1 / Number of Years)] - 1

    In this case, the beginning value is 100 (assuming a starting inflation rate of 0%), and the ending value is the result of compounding the inflation rates over three years. So, the ending value can be calculated as follows:

    Ending Value = Beginning Value * (1 + Inflation Rate Year 1) * (1 + Inflation Rate Year 2) * (1 + Inflation Rate Year 3)

    Plugging in the given inflation rates, we get:

    Ending Value = 100 * (1 + 0.05) * (1 + 0.1) * (1 + 0.15) = 141.21

    So, the average expected annual inflation rate over the next three years can be calculated as:

    CAGR = [(Ending Value / Beginning Value)^(1 / Number of Years)] - 1 = [(141.21 / 100)^(1 / 3)] - 1 = 0.1145 or 11.45%

    Therefore, the average expected annual inflation rate over the next three years is 11.45%.

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