"The assumptions of perfect substitutability of assets and perfect capital mobility mean that interest rates on domestic assets and comparable foreign assets will be equalized."

Question

Quizplus · Accepted Answer

If assets are perfect substitutes and there is perfect capital mobility, then investors will be able to easily move their funds between domestic and foreign assets to take advantage of higher interest rates. This will lead to the equalization of interest rates between the two types of assets.

"The Assumptions of Perfect Substitutability of Assets and Perfect Capital