Economists project the long-run real growth rate for the next five years to be 2.5 percent and the average annual rate of inflation over this five-year period to be 3 percent. What is the expected nominal rate of return over the next five years?
A) 0.500 percent
B) 1.056 percent
C) 2.750 percent
D) 5.500 percent
E) 5.575 percent

Question

Quizplus · Accepted Answer

The formula for calculating the expected nominal rate of return is: 
Nominal rate = Real growth rate + Inflation rate

Substituting the given values: 
Nominal rate = 2.5% + 3% 
Nominal rate = 5.5%

Therefore, the expected nominal rate of return over the next five years is 5.5%. The best choice is E.

Economists Project the Long-Run Real Growth Rate for the Next