Assume that it is now January 1, 2024. The rate of inflation is expected to be 5 percent throughout 2024. However, increased government deficits and other reasons in the economy are then expected to…

Assume that it is now January 1, 2024. The rate of inflation is expected to be 5 percent throughout 2024. However, increased government deficits and other reasons in the economy are then expected to push inflation rates higher. Investors expect the inflation rate to be 6 percent in 2025, 7 percent in 2026, and 8 percent in 2027. The real risk-free rate currently is 2 percent. Assume that no maturity risk premium is required on bonds with 5 years or less to maturity. The current interest rate on 5-year T-bonds is 9 percent a. What is the average expected inflation rate over the next 4 years? b. What should be the prevailing interest rate on 4-year T-bonds? c. What is the implied expected inflation rate in 2028, or year 5, given that bonds which mature in that year yield 9 percent? d. Briefly explain the factors affecting interest rate.