Jeff just received a refund of $2,178 from his family physician. This was an overpayment on his account, and it has been 3 years since the overpayment was due. Jeff is really frosted by this delay! What is the purchasing power now (year 0) of the overpayment if inflation has been 4%, 3%, and 2%, respectively, in years-3 (three years ago), -2 (two years ago), and -1 (last year)?
Jeff just received a refund of $2,178 from his family physician. This was an overpayment on his account, and it has been 3 years since the overpayment was due. Jeff is really frosted by this delay! What is the purchasing power now (year 0) of the overpayment if inflation has been 4%, 3%, and 2%, respectively, in years-3 (three years ago), -2 (two years ago), and -1 (last year)?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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I need help with this problem steps of what's happening would be helpful please and thank yoh!
Transcribed Image Text:**Scenario for Calculating Adjusted Purchasing Power Due to Inflation**
**Context:**
Jeff recently received a refund of $2,178 from his family physician, which was an overpayment on his account. The overpayment occurred three years ago and was only refunded now. Due to this delay, Jeff wants to know the current purchasing power of the refund, given the inflation rates over the past three years.
**Inflation Rates:**
- Year -3 (three years ago): 4%
- Year -2 (two years ago): 3%
- Year -1 (last year): 2%
**Objective:**
Calculate the purchasing power of the $2,178 refund today, after accounting for the inflation rates each year.
**Method:**
To adjust for inflation, you should deflate the refund amount using each year's inflation rate. This involves dividing the refund amount by the cumulative inflation factors for each year.
1. Calculate the cumulative inflation factor for each year:
- Year 3: Multiply $2,178 by the inflation adjustment for that year (1 + 4%).
- Year 2: Multiply the result by the inflation adjustment for that year (1 + 3%).
- Year 1: Multiply the result by the inflation adjustment for that year (1 + 2%).
2. This process effectively tells you how much purchasing power $2,178 from three years ago has today, given the inflation rates during that period.
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