Perfect capital mobility implies:
A)a vertical FE curve.
B)high domestic interest rates relative to foreign interest rates.
C)an FE curve that is horizontal.
D)an FE curve that is steeper than the LM curve.

Question

Quizplus · Accepted Answer

Perfect capital mobility implies that capital flows freely across borders, which means that there are no restrictions on international capital flows. This leads to a situation where interest rates in two countries are equalized. As a result, the FE curve becomes horizontal, as the exchange rate adjusts fully to changes in interest rate differentials. Therefore, choice C is the best answer as it correctly describes the implication of perfect capital mobility.

Perfect Capital Mobility Implies