You are considering the choice between investing $50; 000 in a conventional one-year bank CD1 offering an interest rate of 7% and a one-year "Inflation-Plus" CD offering 3:5% per year plus the rate of inflation.

a. Which is the safer investment?

b. Which offers the higher expected return?

c. If you expect the rate of inflation to be 3% over the next year, which is the better investment? Why?

d. If we observe a risk-free nominal interest rate of 7% per year and a risk-free real rate of 3.5%, can we infer that the market's expected rate of inflation is 3.5% per year