What to do, what to do...

I have a gripe that I wanted to talk about and possible get some advice on, it deals with our babysitter/nanny. Just to fill everyone in, approximately two years ago, Teri and I became pregnant with our second child.Now this was a little bit of a surprise because our eldest was 17 and although we had talked about having more kids, Teri had gone back and finished her schooling and was in the midst of her career as a teacher and had decided that she was "done". Anyways, long story short, we welcomed our second son into our lives and among the happiness of a new child we addressed the pragmatic aspects by getting Teri's Mom to agree to babysit while Teri and I were at work. This was to last for about a year until soon after Jacob's first birthday when we were surprised by her parents telling us that they couldn't handle watching him any more due to Teri's Mom's failing health. Well at this point we made a monumental decision and checking our finances and scouring the valley we hired a part-time nanny for Jacob at the cost of every bit of our surplus cash plus a little, namely around $800 a month; $40 a day for watching him during school time. Well this worked out fine for about a year, even through Teri's Mom's passing and into this school year, until just a few days ago when out of the blue our nanny decided that she wanted a raise - $50 a week more or $200 a month, ouch. Let me back up a little bit and say that the situation has slowly changed, originally the 27 year old woman that we had found was looking for a job/extra income as her husband was a teacher and they were having problems making ends meet. She agreed to watch him at out house and flew through our interview with flying colors. Six months later, she meekly asked us if it was alright to watch Jacob at her house as they only had one car and were having some difficulties with transportation. Since they only lived a couple of miles away we agreed to this. The next change came a couple of months after that, at the beginning of summer, as she let us know that she has a friend who was pregnant and wanted her to watch their baby after he was born also, so Jacob would not be the only child she was watching starting in October. Her next news came only a couple of weeks after that as she proudly announced to my wife one day that she had finally gotten pregnant a couple of weeks before (which is something they had been talking about for years). The trepidation set in at this point as Teri and I were worried about Jacob just being one of a bunch of unrelated kids and the absence of one-on-0ne time which was one of the main selling points of getting a nanny in the first place. We continued on and decided that we would just wait and see how the situation unfolded. That was until this week when 'our nanny' announced to us that everyone else was paying her $50 a day or $250 a week and she felt that we should also. Well we can't afford to give the nanny this raise and we are trying to decide what to do and our having some difficulties coming to a decision. Teri's Dad has offered to chip in the extra $250 a month we would need, but I feel like we are being extorted and what is to say that she won't raise it up again in a year or whatever. Teri has also looked into daycare and Merryhill - a private school with an early childhood curriculum, basically they take children of any age. What to do, what to do...