With perfect asset substitutability and capital mobility the domestic interest rate is equal to the foreign rate.

Question

Quizplus · Accepted Answer

When there is perfect asset substitutability and capital mobility, investors can easily move their capital between domestic and foreign markets in response to interest rate differentials. This equalizes the interest rates in both markets. Hence, the domestic interest rate will be equal to the foreign rate.

With Perfect Asset Substitutability and Capital Mobility the Domestic Interest