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4. Assume that the term premium is 0 and the expectations theory of the term structure is the correct framework. You observe that the
4. Assume that the term premium is 0 and the expectations theory of the term structure is the correct framework. You observe that the interest rate on a 1-year Treasury 1 security is 2%, and the interest rate on a 2-year Treasury security is 4%. What is the market's expectation for 1-year interest rates next year? What does this say about the market's expectations for the future state of the economy?
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