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Little Monsters Inc. borrowed $1,000,000 for two years from NorthernBank Inc. at an 11.5% interest rate. The current risk-free rate is 2% and Little Monsterss

Little Monsters Inc. borrowed $1,000,000 for two years from NorthernBank Inc. at an 11.5% interest rate. The current risk-free rate is 2% and Little Monsterss financial condition warrants a default risk premium of 3% and a liquidity risk premium of 2%. The maturity risk premium for a two-year loan is 1%, and inflation is expected to be 3% next year.

Required: What does this information imply about the rate of inflation in the second year?

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