Q7

Due to a recession, expected inflation this year is only 3.75%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.75%. Assume that the expectations theory holds and the real risk-free rate (r) is 3.5%. If the yleld on 3-year Treasury bonds equals the 1-year yield plus 2.0\%, what inflation rate is expected after Year 1 ? Round your answer to two decimal places