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28 January, 13:00

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?

Answers (1)
  1. 28 January, 14:07
    0.029 or 2.94%


    We know that

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


    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%
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