Currently, the interest rate on one-year Treasury bonds is 2.2 percent, the rate on two-year Treasury bonds is 3.0 percent, and the rate on three-year Treasury bonds is 3.6 percent. These bonds are considered risk free, so the rates given here are risk-free rates (rRF). The one-year bond matures one year from today, the two-year bond matures two years from today, and so forth. The real risk-free rate (r*) for all three years is 2 percent. Using the expectations theory, compute the expected inflation rate for next year—that is, in Year 2. (MRP = 0 for these bonds.)
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