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?

Question

Max Foley

Business

1 May, 13:29

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?

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Answers (1)

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Isabel Saunders · Answer 1

0.029 or 2.94%

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%