Expectations theory holds and the real risk-free rate

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Reference no: EM131050903

INFLATION Due to a recession, expected inflation this year is only 3.25%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.25%. Assume that the expectations theory holds and the real risk-free rate (r*) is 2.5%. If the yield 3-year Treasury Kinds equals the 1-year yield plus 1.5%, what inflation rate is expected after Year 1?

Reference no: EM131050903

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