I saw this MCQ in BPP P&R Mock 1. This is question 12.
Country X uses the dollar as it’s currency and country Y uses the Dinar.
Country X’s expected inflation rate is 5% per year, compared to 2% per year in country Y. Country Y’s nominal interest rate is 4% per year and the current spot rate between the 2 countries is 1.5000 dinar per $1.
According to the four-way equivalence model, the following statement is incorrect as per the answer.
3. Country X real rates should be higher than Y.
Please can you explain the logic behind this why is this incorrect?
