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Due to a recession, expected inflation this year is only 3.75%. However, the inflation rate in Year 2 and thereafter is expected to be constant
Due to a recession, expected inflation this year is only 3.75%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.75\%. Assume that the expectations theory holds and the real risk-free rate (r) is 2.5%. If the yield on 3 -year Treasury bonds equals the 1 -year yield plus 0.5%, what inflation rate is expected after Year 1 ? Round your answe to two decimal places. %
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