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four-way equivalence model – MCQ in BPP P&R Mock 1. This is question 12.

Forums › ACCA Forums › ACCA FM Financial Management Forums › four-way equivalence model – MCQ in BPP P&R Mock 1. This is question 12.

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • December 7, 2021 at 11:03 am #642896
    abi712003
    Member
    • Topics: 11
    • Replies: 1
    • ☆

    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?

    December 7, 2021 at 3:24 pm #642916
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51952
    • ☆☆☆☆☆

    It is because in theory the real rate of interest should be the same in all countries.
    The actual/nominal interest rates change with different levels of inflation.

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