For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:
A) vertical line at 0.
B) horizontal line at the world real interest rate.
C) line that slopes up and to the right.
D) line that slopes down and to the right.

Question

Quizplus · Accepted Answer

In an open economy with perfect capital mobility, there are no restrictions on the flow of capital in and out of the country, so the domestic real interest rate must equal the world real interest rate. Therefore, net capital outflow is horizontal at the world real interest rate. Choosing answer B.

For an Open Economy with Perfect Capital Mobility, When Net