Several months of data showed the cpi increasing

Reference no: EM13761947

Suppose that several months of data showed the CPI increasing at a 4.5% annual rate due largely to increases in the price of energy and food related commodities following several years when the CPI only increased by 1% per year. Suppose thisincrease causes investor expectations of annual inflation to also increase from 1% to4.5%. Assume, at the same time that fears of higher inflation creates concerns that risinginterest rates will derail the economic recovery and lead to another recession. Assume theresulting increase in risk aversion among investors drives the expected real rate of returnrequired to equate investor demand to the existing supply of 1 year Treasury notes downto 0.5 % from 2%. What would you expect to happen to the nominal yields on 1-year T-notes during the period over which these changes in inflation expectations and required real yields occurred?

Reference no: EM13761947

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