Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 4.50% per year. What is the real risk-free rate of return, r*? Disregard any cross-product terms, i.e., if averaging is required, use the arithmetic average.

1. 2.50%
2. 2.60%
3. 2.70%
4. 2.13%
5. 2.03%