Question: Due to the recession the inflation rate for the coming
Due to the recession, the inflation rate for the coming year is 4%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 5%. Assuming that the real risk free rate is 3% for all maturities and that there are no maturity premiums. If 4-year Treasury notes yield 4 percentage points more than 1-year notes, what inflation rate is expected after Year 1?
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