1. ) 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 2%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 2%, what inflation rate is expected after Year 1? Round your answer to two decimal places.

2. ) Suppose 2-year Treasury bonds yield 4.9%, while 1-year bonds yield 4.8%. r* is 1.25%, and the maturity risk premium is zero. Negative expected inflation rates, if any, should be indicated by a minus sign.

Using the expectations theory, what is the yield on a 1-year bond, 1 year from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places. --------- %

What is the expected inflation rate in Year 1? Do not round intermediate calculations. Round your answer to two decimal places. --------- % What is the expected inflation rate in Year 2? Do not round intermediate calculations. Round your answer to two decimal places. ------------ %