5. Suppose the Central Bank sets 1 year real interest rates by following this Taylor rule: rt = f+ 0.50:9 n") where f = 4% and n' = 3% 1:9 = expected ination rate Nominal interest rate is equal to the real interest rate plus the expected inflation rate it : rt + He These questions calculates what would happen to short term and long term interest rates if the ination rate changed. (a) Suppose in period 1 inflation is expected to be 1 5%. Calculate 1 year nominal and real interest rates in period 1. {b} Suppose in period 2 inflation expected to be 5% {that is for the year HI}. Calculate nominal and real interest rates in period t+1 {c} Suppose in period 3 inflation expected to be 7% [that is for the year H2). Calculate nominal and real interest rates in period H2 (d) Calculate the 2 year interest rate at time t (e) Calculate the 3 year interest rate at time t {f} Use the answers from part (a) to {e} and complete the table for interest rates. maturity Date t t + 1 t + 2 1 2 3 {3} Sketch the yield curve Maturity Date