We notice that the current one-year Treasury rate (1R1) is 7% and the two year treasury rate (1R2) is 7.5%
a) If economists expect the one-year rate next year to be 5.4%, what is the liquidity premium next year if the liquidity premium theory holds?
b) If the real rate is 4% and the price of pizza is currently $5, how much will you expect the price of pizza to be next year?