Suppose 2-year Treasury bonds yield 3.7%, while 1-year bonds yield 2.7%. r* is 1%, and the maturity risk premium is zero.

1. Using the expectations theory, what is the yield on a 1-year bond, 1 year from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.

   %

2. What is the expected inflation rate in Year 1? Year 2? Do not round intermediate calculations. Round your answers to two decimal places.

   Expected inflation rate in Year 1: %

   Expected inflation rate in Year 2: %