Due to a recession, expected inflation this year is only 1.0%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 1.0%. Assume that the expectations theory holds and the real risk-free rate (r*) is 2.0%. If the yield on 10-year Treasury bonds equals the 1-year yield plus 19.50%, what inflation rate is expected after Year 1? 22.667% 20.500% 19.500% 22.500% Previous Page Next Page Page 9 of 15