Complete the following statement, "With a fixed exchange rate, and perfect capital mobility, the
______________ must match _________ to prevent massive capital flows and allow equilibrium in the
Foreign exchange market."
A) domestic trade balance, a competitor's trade balance
B) domestic growth, a competitor's growth
C) domestic interest rates, foreign interest rates
D) domestic inflation, a competitor's inflation

Question

Quizplus · Accepted Answer

With a fixed exchange rate and perfect capital mobility, domestic interest rates must match foreign interest rates to prevent massive capital flows that could disrupt equilibrium in the foreign exchange market. This is because investors will move their capital to where they can get the highest returns, so if interest rates are higher abroad, capital will flow out of the country, and vice versa.

Complete the Following Statement, "With a Fixed Exchange Rate, and Perfect