With perfect capital mobility, the LM and FE curves are both horizontal.

Question

Quizplus · Accepted Answer

If there is perfect capital mobility, it means that the interest rate is determined globally and is the same in all countries. This makes the LM curve perfectly elastic, meaning that a change in income will have no effect on the interest rate. As a result, the FE curve will also be horizontal because there is no exchange rate adjustment needed to balance out the differences in interest rates between countries.

With Perfect Capital Mobility, the LM and FE Curves Are