Because of a recession, the inflation rate expected for the…
Because of a recession, the inflation rate expected for the coming year is only [i1]%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above [i1]%. Assume that the real risk-free rate is r* = [rf]% for all maturities and that there are no maturity risk premiums. If [n]-year Treasury notes yield [x] percentage points more than 1-year notes, what inflation rate is expected after Year 1? Round your answer to two decimal places and express in percentage form (x.xx%).
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