If the real interest rate is 5%, the rate of inflation in the United States is 6%, and the rate of inflation in the United Kingdom is 3%, which of the following statements would NOT be true?
A)The nominal rate of interest in the United States would be greater than the nominal interest rate in the United Kingdom.
B)The difference between the U.K. and U.S. interest rates is a function of the difference between their inflation rates.
C)The nominal rate of interest in the United States and the United Kingdom would be the same because of purchasing power parity.
D)Investors would get a higher return on their money in the United States.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) does not necessarily imply that nominal interest rates will be equal between two countries. PPP refers to the equilibrium exchange rate between two currencies, based on their relative purchasing power. In this scenario, the nominal interest rate in the US would be higher than in the UK, reflecting the higher inflation rate in the US. Therefore, statement C would not be true.

If the Real Interest Rate Is 5%, the Rate of Inflation