Suppose 2-year Treasury bonds yield 3.3%, while 1-year bonds yield 2.7%. r* is 1%, and the maturity risk premium is zero. Using the expectations theory, what is the yield on a 1-year bond, 1 year from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places. % What is the expected inflation rate in Year 1? Year 2? Do not round intermediate calculations. Round your answers to two decimal places. Expected inflation rate in Year 1: % Expected inflation rate in Year 2: %

3.90%

1.7%

2.9%

Explanation:

Give the following :

Yield on 2 years Treasury bond (Y2) = 3.3% = 0.033

Yield on 1 years Treasury bond (Y1) = 2.7% = 0.027

r* = risk free rate = 1%

Yield on 1 year bond, 1 year from now :

Compounded yield on yield 1 at 2.7% + Interest on return = compounded yield on 2 years bond :

(1 + 0.027) = yield on year 1

(1 + y) = yield one year from now

(1 + 0.027)¹ + (1 + y)¹ = (1 + 0.033)²

1 + y = (1 + 0.033)² / (1 + 0.027)¹

1 + y = 1.067089 / 1.027

1 + y = 1.0390350

y = 1.0390350 - 1

y = 0.03903

Yield = 0.039 * 100% = 3.90%

Inflation premium = yield rate - Risk free rate - maturity risk premium

Maturity risk premium = 0%

Hence,

For year 1

Inflation premium = 2.7% - 1% - 0% = 1.7%

For year 2:

Inflation premium = 3.9% - 1% - 0% = 2.9%

answer/// real gdp decreases to y3 and the price level falls to p3;

two years ago, when picking flowers in the mountains back of yosemite valley, i found a book. it was blotted and storm-beaten; all of its outer pages were mealy and crumbly. the paper seemed to dissolve like the snow beneath which it had been buried, however; many of the inner pages were well preserved. and although all were more or less stained and torn, whole chapters were easily readable. this is the condition of the great open book of yosemite glaciers today; its granite pages have been torn and blurred by the same storms that wasted the castaway book.

two years ago, when picking flowers in the mountains back of yosemite valley; i found a book. it was blotted and storm-beaten, all of its outer pages were mealy and crumbly. the paper seemed to dissolve like the snow beneath which it had been buried, however, many of the inner pages were well preserved. and although all were more or less stained and torn; whole chapters were easily readable. this is the condition of the great open book of yosemite glaciers today, its granite pages have been torn and blurred by the same storms that wasted the castaway book.