As the U.S. economy recovered from the \"Great Recession\" of 2007-2009, it was
ID: 1205383 • Letter: A
Question
As the U.S. economy recovered from the "Great Recession" of 2007-2009, it was widely anticipated that the Fed would raise the federal funds rate. Suppose the current federal funds rate is 1 percent, and that this rate is expected to prevail for one more year. Then, the expectation is that the Fed will raise the federal funds rate by 1 percent each year for 4 years, reaching 5 percent in year five and then maintaining the federal funds rate at that level for another 5 years. Complete the following table with the interest rates for the next 10 years. {Enter your responses as whole numbers.) As a result of these expectations, the 10-year nominal interest rate will be percent. (Round your response to one decimal place.)Explanation / Answer
Long-term nominal interest rates should be an average of current and expected nominal short-term rates
So, the 10 year nominal interst rate = Average of 10 years yearly interest rate
10 year nominal interst rate = (1 + 2 + 3 + 4 + 6*5)/10
10 year nominal interst rate = 40/10 = 4%
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