If we have perfect capital mobility and financial markets expect the domestic currency to appreciate in value, then

Question

Quizplus · Accepted Answer

With perfect capital mobility, investors will seek to invest in countries where they expect higher returns. If financial markets expect the domestic currency to appreciate in value, there will be a loss in competitiveness, as the domestic goods and services will become more expensive compared to foreign products. This will lead to a decrease in exports and an increase in imports, causing a balance of payment deficit. As a result, there will be an outflow of capital to countries abroad, which will put further pressure on the domestic currency to depreciate. Therefore, C is the correct answer. A, B, and D are incorrect because they are not necessarily true in this scenario.

If We Have Perfect Capital Mobility and Financial Markets Expect