365. Country A uses the dollar as its currency and country B uses the dinar.
Country A’s expected inflation rate is 5% per year, compared to 2% per year in country B. Country B’s nominal interest rate is 4% per year and the current spot exchange rate between the two countries is 1.5000 dinar per $1.
According to the four-way equivalence model, which of the following statements is/are true?
1 Country A’s nominal interest rate should be 7.06% per year
2 The future (expected) spot rate after one year should be 1.4571 dinar per $1
3 Country A’s real interest rate should be higher than that of country B