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Due to a recession, expected inflation this year is 3%, and 3.25% in year 2. However, the inflation rate in year 3 and thereafter is
Due to a recession, expected inflation this year is 3%, and 3.25% in year 2. However, the inflation rate in year 3 and thereafter is expected to be constant. Assume the expectations theory holds and the real risk-free rate is 2.5%. If the yield on 4-year T-bond equals 1-year bond plus 2%, what is the inflation rate after year 2?
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