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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?
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.