What rate of inflation is expected in year three and beyond

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Economists expect the inflation rate to be 1.5 percent for the coming year and the following year, and then after Year 2 inflation will settle at a constant rate greater than 1.5 percent. The yield is the same on one-year bonds and two-year bonds; the yield on three-year bonds is 0.5 percent greater than on one-year and two-year bonds. The real risk-free rate is 2 percent for all bonds. If the bonds are risk-free, what rate of inflation is expected in Year 3 and beyond?

Reference no: EM13724020

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