Question

Chegg As the U.S. economy continues to recover from the effects of the recession of 2007–2009, it is widely anticipated that the Fed will keep raising the federal funds rate. Suppose the current federal funds rate is 1.5 percent, and that this rate is expected to prevail for 1 more year. Then, the expectation is that the Fed will raise the federal funds rate by 0.5 percentage points each year for 4 years, reaching 3.5 percent in year five and then maintaining the federal funds rate at that level for another 5 years. What will be the 10-year nominal interest rate as a result of these expectations? Explain and show your work.

Answer 1

Answer:

Year 1= 1.5%

Year 5= 3.5%

Year 10= 3.5%

10 year nominal interest rate will be 3.5%

Explanation: