With a _____ exchange rate, and perfect capital mobility, the domestic interest rate must _____ foreign
Interest rates to prevent massive capital flows and allow equilibrium in the foreign exchange market.
A) fixed, match
B) fixed, be greater than
C) fixed, be less than
D) floating, match

Question

Quizplus · Accepted Answer

With a fixed exchange rate and perfect capital mobility, the domestic interest rate must match foreign interest rates to prevent massive capital flows and maintain equilibrium in the foreign exchange market. This is because any difference in interest rates would lead to capital flows in search of higher returns, which would put pressure on the fixed exchange rate.

With a _____ Exchange Rate, and Perfect Capital Mobility, the Domestic