Kaplan Mock Question

Hi all there is a question in the Kaplan mock which asks - Given his economic outlook for Ionia, what is the most likely outlook for cash instruments in this country?

The context of the passage states:

  • Vas is also concerned that policy rates in Ionia are too high, leaving the economy vulnerable to a deflationary shock.
  • He asks Dhanda if he should adjust his allocation to the two markets based on his concerns, including the option of allocating to short-term, interest-bearing cash instruments.

The answer was that cash is attractive - however, I thought it would only be attractive in the event where the interest rate for cash bearing instruments has a floor at 0%, which is not mentioned in the passage.

I believe the CFA text states something like: With the economy contracting and inflation falling, short-term rates will likely be in a sharp decline. Cash, or short-term interest-bearing instruments, is unattractive in such an environment. However, deflation may make cash particularly attractive if a “zero lower bound” is binding on the nominal interest rate. Otherwise, deflation is simply a component of the required short-term real rate.

The answer confuses me because, how are we meant to know when it seems attractive or unattractive when it could be either (depending on whether there is a floor in the interest rates which is not mentioned in the passage). Am I missing something or is this just not a good question?

you can hoard cash at home maybe tuck it under your mattress, in that scenario you are enforcing a floor of 0%. Short term interest bearing instruments can be exchanged for cash and cash equivalents.
its not necessary to hold or deposit cash in bank thereby guaranteering atleast a 0% rate

Which Mock Exam is this?
Kaplan Mock Exam (2023 version)?
Is this Mock 1,2,3,4,5 or 6?

Hi Sydney,

I believe it was mock 1 2023

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Thanks @alihamz121