Forty years ago, a gallon of gas cost $1.20. Today, a gallon of gas costs 2.60. Suppose that the gas price increase has been entirely due to inflation. 

a.Calculate the annual inflation rate.

b.Today, you plan to make a cash purchase for a new car. The Model K costs $24,000andyou estimate the car will last 10 years and require 600 gallons per year. The Model M costs $28,000but gets better mileage, so it will only require400 gallons per year. The cars are identical in all other respects, and will both be worthless after 10 years. Assume that gas prices will rise by the rate of inflation (that you calculated in part a). If the nominal interest rate is 9% per year, which car should you purchase? 

Answer rating: 100% (QA)

a ending value beginning value x 1 inflation rate number of years 260 120 x1 inflation rate 40 ... View the full answer