What inflation rate is expected after year

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Reference no: EM131060470

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

Reference no: EM131060470

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