Maintaining the federal funds rate

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Reference no: EM132156921

As the U.S. economy recovered from the recession of 2007-2009, it was widely anticipated that the Fed would raise the federal funds rate.

Suppose the current federal funds rate is 1 percent and that this rate is expected to prevail for one more year. Then, the expectation is that the Fed will raise the federal funds rate by 1 percent each year for 4 years, reaching 5 percent in year five, and then maintaining the federal funds rate at that level for another five years.

What will be the 10-year nominal interest rate as a result of these expectations? Explain and show your work.

Reference no: EM132156921

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