In an economy with perfect capital mobility,if domestic interest rates are above world interest rates then

Question

Quizplus · Accepted Answer

With perfect capital mobility, capital will flow from the domestic economy to the world economy where interest rates are higher. This will lead to an increase in capital inflows and a decrease in domestic interest rates. Therefore, option B is the best choice. Option A is incorrect because capital outflows would occur if domestic interest rates were lower than world interest rates. Option C is incorrect because current account deficits are not directly related to interest rates. Option D is incorrect because the central bank may not need to intervene if exchange rates are floating and capital flows are adjusting the interest rates.

In an Economy with Perfect Capital Mobility,if Domestic Interest Rates