The assumption of imperfect substitution between assets in the asset market models implies that
A) domestic and foreign money are perfect substitutes.
B) uncovered IRP holds.
C) there is no foreign exchange risk premium.
D) None of the above.

Question

Quizplus · Accepted Answer

Imperfect substitution implies that domestic and foreign assets are not perfect substitutes, leading to potential deviations from uncovered interest rate parity and the existence of a foreign exchange risk premium.

The Assumption of Imperfect Substitution Between Assets in the Asset