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What inflation rate is expected after year

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Question 1: Due to a recession, expected inflation this year is only 2.75%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2.75%. Assume that the expectations theory holds and the real risk-free rate (r*) is 2.5%. If the yield on 3- year Treasury bonds equals the 1-year yield plus 1.0%, what inflation rate is expected after Year 1? Round your answer to two decimal places.

Reference no: EM132485100

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