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Hi sir! according to the standard answer, I got 2 questions here.
1: The first question of Q12 here is calculated as (1.04*1.05/1.02)-1 and I can feel it is right, but I cannot tell it clearly, could you explain it for me? Thanks!
2: The standard answer of the third question here says real rates should be the same, and this is my explanation : the real interest rates are rates don’t include inflation, and according to the purchasing power parity theory assumes that the inflation is the only thing that affect rates, hence the real interest rates here should be the same. But I am not sure if my explanation is right or not, please let me know sir! If it’s wrong, could you explain it for me? Thank you so much!
1. In theory interest rates and inflation rates should move up and down in proportion to each other.
2. Your explanation is correct.
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