Help ME Out Please!!!?

Question

Suppose that several months of data showing the CPI increasing at a 4% annualized rate caused expectations of annual inflation to increase from 2.5% to 4% but, at the same time, fears of recession and default on corporate and asset backed bonds reduced the expected real rate of return required to equate investor demand to the existing supply of 1 year Treasury notes to 0.5 % from 1.5%. What would you expect to happen to the nominal yields on 1-year T-notes during the period over which these changes in inflation expectations and required real yields occurred

Answer 1

Simple:

add 1.5%(4-2.5) and and subtract 1% (1.5-1) to get increase .5%

Answer 2

Increase: the real rate has increased, and the nominal rate must also increase to accommodate the increased erosion of value through inflation