14-2 Assume that it is now January 1, 2008. The rate of inflation is expected to be 2 percent throughout 2008. In 2009 and after, increased government deficits and renewed vigor in the economy are expected to push inflation rates higher. Investors expect the inflation rate to be 3 percent in 2009, 5 percent in 2010, and 6 percent in 2011. The real risk-free rate, r*, currently is 3 percent. Assume that no maturity risk premiums are required on bonds with five years or less to maturity. The current interest rate on five-year T-bonds is 8 percent. a. What is the average expected inflation rate over the next four years? b. What should be the prevailing interest rate on four-year T-bonds? c. What is the implied expected inflation rate in 2012, or Year 5?