1. Krusty Krab Inc. borrowed $1,000,000 for two years from Northern Bank Inc. at an 11.5% interest rate. The current risk-free rate is 2% and Krusty Krabs financial condition warrants a default risk premium of 3% and a liquidity risk premium of 2%. The maturity risk premium for two-year loan is 1% and inflation is expected to be 3% next year. What does this information imply about the rate of inflation in the second year?