1. You are considering the choice between investing $50,000 in a conventional 1-year bank CD offering an interest rate of 5% and a 1-year Inflation-Plus CD offering 1.5% per year plus the rate of inflation.

1. Which is the safer investment if consider the potential volatility in your purchasing power?
2. If you expect the rate of inflation to be 3% over the next year, which is the better investment? Why?
3. [Challenging] If we observe a risk-free nominal interest rate of 5% per year and a risk-free real rate of 1.5% on inflation-indexed bonds, can we infer that the markets expected rate of inflation must be 3.5% per year?