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John Moffat.
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abi712003
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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?
John Moffat
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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.
abi712003
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