Due to recession, expected inflation this year is only 4.25%. However, the inflation rate in year 2 and thereafter is expected to be constant at some level above 4.25%. Assume that the expectations theory holds and real risk free rate (r*) is 3.5%. If the yield on 3-year Treasury bonds equals the 1-year plus 0.5%, what inflation rate is expected after Year 1? Assume that the expectations theory holds and the real risk-free rate (r*) is 3.5%. if the yield on 3-year Treasury bonds equals the 1-year yield plus 0.5%, what inflation rate is expected after year 1?