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What inflation rate is expected after year 1

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

Reference no: EM132443319

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