Inflation Risk Premiums

Because of a recession, the inflation rate expected for the coming year is only 2%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2%. Assume that the real risk-free rate is r* = 2% for all maturities and that there are no maturity risk premiums. If 3-year Treasury notes yield 2 percentage points more than 1-year notes, what inflation rate is expected after Year 1? Round your answer to the nearest whole number.

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