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Due to a recession, expected inflation this year is only 2%. However, the inflation rate in...

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

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jeff jeffy answered 2 years ago
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