Assuming there is perfect capital mobility, compared to a large open economy, a small open economy is one in which the:
A) exchange rate is fixed.
B) exchange rate is floating.
C) domestic interest rate equals the world interest rate.
D) domestic interest rate is not equal to the world interest rate.

Question

Quizplus · Accepted Answer

In a small open economy with perfect capital mobility, the domestic interest rate equals the world interest rate because the economy is too small to influence the global interest rate. Investors can freely move capital across borders to equalize interest rates, ensuring the domestic rate aligns with the world rate.

Assuming There Is Perfect Capital Mobility, Compared to a Large