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Due to the recession, the rate of inflation expected for the coming year is only 3.5 percent. However, the rate of inflation in Year 2

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Due to the recession, the rate of inflation expected for the coming year is only 3.5 percent. However, the rate of inflation in Year 2 and thereafter is expected to be constant at some level above 3.5 percent. Assume that the real risk-free rate is k* = 2% for all maturities and that the expectations theory fully explains the yield curve, so there are no maturity risk premiums. If 3-year Treasury bonds yield 3 percentage points (0.03) more than 1-year bonds, what rate of inflation is expected after Year 1

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