Question

Scenario Six: A commercial jet manufacturer has a cost index equal to 94.9 per aircraft in 2013, and 206.8 in 2018. The average compound rate of growth of the cost index is anticipated to be stable for the foreseeable future. An aircraft costs $10.2 million to build in 2014. 22. What is the average compound rate of annual growth in aircraft costs? a. 2.2% b. 2.4% 2.6% C. d. 2% 23. What is the anticipated cost of an aircraft in 2020? $11.76 million b. $11.90 million c. $37.08 million d. $10.2 million a. 24. What is the real value of an aircraft built in 2020 using 2014 prices? $11.76 million b. $11.90 million $37.08 million d. $10.2 million a. C. 25. Suppose that the consumer price index (CPI) falls from 184 to 176 over the course of 1 year. Economists refer to this as: a. Disinflation b. Reinflation c. Deflation d. Inflation

Answer 1

22.

B

Working note:

Time = 5 years

Average compound rate of annual growth = (106.8/94.9)^(1/5) -1 = 2.4%

23.

A

Working note:

Time = 6 years

Anticipated cost in 2020 = 10.2*(1+2.4%)^6 = $11.76 Million

24.

D

25.

C

Deflation is the negative of inflation that takes place when CPI decreases.