Question 1 The real risk-free rate of interest is 1 percent. Inflation is expected to be 5 percent this coming year, jump to 7 percent next year, and increase to 8 percent the year after (Year 3). According to the expectations theory, what should be the interest rate on 2-year, risk-free securities today? 6.50% 6.00% O 7.50% O 5.50% O 7.00% 1 pts

The real risk-free rate of interest is 1 percent. Inflation is expected to be 5 percent this coming year, jump to 7 percent next year, and increase to 8 percent the year after (Year 3 ). According to the expectations theory, what should be the interest rate on 2 -year, risk-free securities today? 6.50% 6.00% 7.50% 5.50% 7.00%