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A Treasury note with a maturity of four years carries a nominal
rate of interest of 10 percent. In contrast, an eight-year Treasury
bond has a yield of 8 percent.
a. If inflation is expected to average 7 percent over the first four
years, what is the expected real rate of interest?
b. If the inflation rate is expected to be 5 percent for the first
year, calculate the average annual rate of inflation for years
2 through 4.

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