What is the implication of perfect capital mobility for a small open economy like Canada's?
A)The real interest rate in Canada should exceed the real interest rate prevailing in world financial markets.
B)The real interest rate in Canada should equal the real interest rate prevailing in world financial markets.
C)The real interest rate in Canada should be less than the real interest rate prevailing in world financial markets.
D)The real interest rate is irrelevant for capital mobility.

Question

Quizplus · Accepted Answer

With perfect capital mobility, capital flows freely between countries, driving interest rates towards equilibrium. In other words, the real interest rate in Canada should equal the real interest rate prevailing in world financial markets. This is because investors will seek the highest return available, and if the interest rate is higher in another country, they will move their funds there. Therefore, Canada cannot maintain a higher or lower interest rate than the global market in the long run.

What Is the Implication of Perfect Capital Mobility for a Small