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    Complexity07's Avatar
    Complexity07 Posts: 15, Reputation: 2
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    #1

    Mar 3, 2008, 10:34 PM
    Geometric Mean Rate of Increase
    A recent article suggested that if you earn $25,000 a year today and the inflation rate continues at 3 percent per year, you'll need to make $38,598 in 10 years to have the same buying power. You would need to make $44,771 if the inflation rate jumped to 6 percent. Confirm that these statements are accurate by finding the geometric mean rate of increase.


    I'm not sure if I calcuated this correctly: I calcualted the square root of 44,771/25,000 and I came up with 158.113883. If this is incorrect, could someone tell me what I am doing wrong?
    iamthetman's Avatar
    iamthetman Posts: 105, Reputation: 8
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    #2

    Mar 4, 2008, 08:28 AM
    Here's how the formula works for the 10 year problem:

    Present Value Amount * (1 + interest rate)^number of year = Final Value Amount

    25,000 * (1 + interest rate)^10 = 38,598
    Complexity07's Avatar
    Complexity07 Posts: 15, Reputation: 2
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    #3

    Mar 5, 2008, 12:33 PM
    I think I got it... is this correct?

    3% --Square root 10th ( 33598/25000) = 1.34392 = 1.030 – 1 = .030 = 3%
    6%-- Square root 10th ( 44,771/25,000) = 1.059 -1 = .059 = 6%
    iamthetman's Avatar
    iamthetman Posts: 105, Reputation: 8
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    #4

    Mar 7, 2008, 09:19 AM
    Looks good!
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