What inflation rate is expected after year 1

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Inflation Due to a recession, expected inflation this year is only 2.5%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2.5%.

Assume that the expectations theory holds and the real risk-free rate (r*) is 3.25%.

If the yield on 3-year Treasury bonds equals the 1-year yield plus 3.25%, what inflation rate is expected after Year 1? Round your answer to two decimal places.

Reference no: EM131926853

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