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SCENARIO 6-3Assume that the real risk-free rate, r*, equals 3%, and it is expected to be constant over time. Expected inflation is expected to be

SCENARIO 6-3Assume that the real risk-free rate, r*, equals 3%, and it is expected to be constant over time. Expected inflation is expected to be 3% in Year 1, 4% in Year 2, and 5% in Year 3. Assume that the maturity risk premium (MRP) = 0. The interest rate on Treasury securities that mature in four years is 8%. What is expected inflation in Year 4?

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