Suppose we have the yield and maturity information on treasury securities from a current yield curve. A 1-year T-bond currently yields 4.50% and a 3-year T-bond yields 9.80%. Assuming the pure expectations theory is correct, what is the market's forecast for interest rates on a 2-year treasury security, 1 year from now

12.55%

Explanation:

The computation is shown below:

(1 + 3 Year Yield)^3 = (1 + 1 Year Yield) × (1 + 2 Year Yield 1 year from now)^2

(1 + 9.80%)^3 = (1 + 4.50%) × (1 + 2 Year Yield 1 year from now)^2

1.323753 = 1.0450 × (1 + 2 Year Yield 1 year from now)^2

1.266749 = (1 + 2 Year Yield 1 year from now)^2

1.1225 = 1 + 2 Year Yield 1 year from now

So,

2 Year Yield 1 year from now = 0.1255

= 12.55%

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answer: in the short-run firms will respond by raising the price of turkey.

explanation: initially the long-run equilibrium is at a price of $5 per pound of turkey and a quantity of 50 million pounds per year. now, when webmd claims that a protein found in turkey will increase your expected lifespan by 4 years. the consumers demand for turkey will increase at every price shifting the demand curve to the right from d1 to d2. while, there will be no change in the supply curve in the short-run as it is not possible for producers to adjust supply so quickly. as a result the new equilibrium will occur at a higher price and a higher quantity of turkey.

thus, in the short run firms will respond by increasing the price of turkey, selling more quantity at a higher price and earning economic profits.