The following annual inflation rates have been forecast for the next 5 years:

Year 1....................................3%

Year 2....................................4%

Year 3....................................5%

Year 4....................................5%

Year 5....................................4%

Use the average annual inflation rate and a 3% real rate to calculate the appropriate contract rate for a 1-year and a 5-year loan. How would your contract rates change if the Year 1 inflation forecast increases to 5%? Discuss the difference in the impact on the contract rates from the change in inflation.