Assignment 24) A) Suppose that several months of data s

Assignment 24) A) Suppose that several months of data showed the CPI increasing at a 4.5%
annualized rate due largely to increases in the price of energy and food related
commodities following several years when the CPI only increased by 1% per year.
Suppose this increase causes investor expectations of annual inflation to also increase
from 1% to 4.5%. Assume at the same time that fears of higher inflation creates
concerns that rising interest rates will derail the economic recovery and lead to another
recession. Assume the resulting increase in risk aversion among investors drives the
expected real rate of return required to equate investor demand to the existing supply of 1
year Treasury notes down to 0.5 % from 2%. What would you expect to happen to the
nominal yields on 1-year T-notes during the period over which these changes in inflation
expectations and required real yields occurred? (Give a numerical answer if possible)
Explain your reasoning. 4 pts.
Assignment 24) A) Suppose that several months of data showed the CPI increasing at a 4.5%
annualized rate due largely to increases in the price of energy and food related
commodities following several years when the CPI only increased by 1% per year.
Suppose this increase causes investor expectations of annual inflation to also increase
from 1% to 4.5%. Assume at the same time that fears of higher inflation creates
concerns that rising interest rates will derail the economic recovery and lead to another
recession. Assume the resulting increase in risk aversion among investors drives the
expected real rate of return required to equate investor demand to the existing supply of 1
year Treasury notes down to 0.5 % from 2%. What would you expect to happen to the
nominal yields on 1-year T-notes during the period over which these changes in inflation
expectations and required real yields occurred? (Give a numerical answer if possible)
Explain your reasoning. 4 pts.
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