Determine the inflation- free interest rate/Macroeconomics
Suppose you are known in your neighborhood as “da bomb financial Mack Daddy”. A couple with an 8 year-old daughter have thus come to you for financial advice. They would like to save for their daughter’s college expenses in advance. Assuming that she enters college 10 years from the present, they estimate that an amount of $9,000 per year in terms of today’s dollar is required for her tuition and books at UMass Amherst. She intends to study for 4 years (because this college doesn’t do Co-op), but her parents know her too well and considering how much she parties now, they think it’ll probably take her six years to get her criminal justice degree (without Co-oping!!!). Therefore, they want to plan for six years of study. It is also estimated that the future rate of inflation will be 8% per year. If the inflation- free interest rate is 3.7%, what uniform amount does this couple have to save each year until they send their daughter to college (total of 10 payments into savings)
