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EXPECTATIONS THEORY AND INFLATION: Suppose 2-year Treasury bonds yield 4.1%, while 1-year bonds yield 3.2%. r* is 1%, and the maturity risk premium is zero.

a. Using the expectations theory, what is the yield on a 1-year bond 1 year from now? Calculate the yield using a geometric average.

b. What is the expected inflation rate in Year 1? Year 2?

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