Question

Over the last five years John's salary has risen in nominal terms from $50,000 to $63,814. Over those same five years, inflation has averaged 2% per year, each year. Based on the this data, what was John's average per year raise in real terms over the five year period?

Answer 1

0.029 or 2.94%

Step-by-step explanation:

We know that

Real rate of return = {( 1 + nominal rate of return) ÷ ( 1+ inflation rate)} - 1

where,

Nominal rate equal to

= (Rise salary ÷ base salary)^1 ÷ number of years - 1

= ($63,814 ÷ $50,000)^1 ÷ 5 - 1

= 5%

And, the inflation rate is 2%

So, the real rate of return would be

= {( 1 + 0.05) ÷ ( 1 + 0.02)} - 1

= 0.029 or 2.94%