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Due to a recession the inflation rate expected for the

Due to a recession, the inflation rate expected for the coming year is only 3 percent. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3 percent. Assume that the real risk-free rate is r* _ 2% for all maturities and that there are no maturity premiums. If 3-year Treasury notes yield 2 percentage points more than 1-year notes, what inflation rate is expected after Year 1?

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Finance Basics: Due to a recession the inflation rate expected for the

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