$($Interest Rate Fundamentals; $\backslash (\backslash$mathbf$\{5\}\backslash )$ points$)$ You read in Businessweek that a panel of economists has estimated that the long$-$run real growth rate of US economy over the next five$-$year period will average $3$ percent. In addition, a bank newsletter estimates that the average annual rate of inflation during the five$-$year period will be about $4$ percent. What nominal rate of return would you expect on US government T$-$bills during this period?

$($Interest Rate Fundamentals; $10$ points$)$ What would your required rate of return be on common stocks if you wanted a $5$ percent risk premium to own common stocks given what you know from problem $\backslash$#$1?$ If common stock investors became more risk averse, what would happen to the required rate of return on common stocks? What would be the impact on stock prices?