Chp8: Inflation

Question 1

Explain Inflation and Rate of Inflation?

Answer 1

Inflation exists if
• Real cost of goods increases.
• Purchasing power of money declines

𝐶1 = 𝐶o( 1 + 𝑓)

where f = (C1-Co)/Co
𝐶0 = cost at period 0
𝑓 = rate of inflation for period 1
𝐶1 = cost at period 1

Question 2

Elaborate what is Purchasing Power (K)?

Answer 2

• Determined by the cost of goods.
• Inversely proportional to Price Index.
Write out the KP formula

Question 3

What are the main columns?

Answer 3

1) Year
2) Cash Outflow (PI & Amount)
3) Cash Inflow (PI & Amount)
4) Net Cashflow (C$ &Z $)
* *under Z add salvage amount