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Due to a recession, expected inflation this year is only 3.17%. However, the inflation rate...

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Finance

Due to a recession, expected inflation this year is only 3.17%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.17%. Assume that the expectations theory holds and the real risk-free rate (r*) is 2.17%^. If the yield on 3-year Treasury bonds equals the 1-year rate plus 1.6%, what inflation rate is expected after year 1? State your answer as a percentage to 2 decimal places. Do not include the % symbol.

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