Inflation refers to an increase in the price of goods and services over time.
As inflation grows exponentially, the compound interest formula can be used.
price after time,
time in years
where is the inflation rate
The cost of a phone is $650 and the average inflation rate is 4% p.a.
a) What is the price of the phone after one year?
Find the value of .
As this is the first year, we can simply multiply the cost by the growth rate.
The price of the phone after one year is $676.
b) What will the phone cost after five years (write your answer to the nearest dollar)?
Use the formula.
After five years the phone will cost $791.
Effective Interest Rate
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