The assumption of perfect capital mobility is best suited to the modeling of ________ economies.

Question

Quizplus · Accepted Answer

The assumption of perfect capital mobility implies that a country has unrestricted capital flows, meaning that it can borrow and lend at the same interest rates as the rest of the world. This assumption is best suited to small open economies, which have limited influence over the world interest rates and are price-takers of international financial markets. Large economies are more likely to be able to affect world interest rates, making the assumption of perfect capital mobility less appropriate. Closed economies, on the other hand, do not engage in international financial markets, rendering the assumption of capital mobility irrelevant.

The Assumption of Perfect Capital Mobility Is Best Suited to the Modeling