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Because of recession, the inflation rate expected for the coming year is only 2%. However,...

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Accounting

Because of recession, the inflation rate expected for the coming 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 real risk-free rate is r*=3% 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 is expected after year 1?

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