As long as assets are perfectly substitutable, an increase in the interest rate in France relative to Canada will cause
A) capital to move from Canada to France.
B) capital to move from France to Canada.
C) an interest rate decrease in Canada.
D) nothing to happen because the assets are perfectly substitutable.

Question

Quizplus · Accepted Answer

When assets are perfectly substitutable, an increase in the interest rate in one country (France, in this case) relative to another (Canada) makes investing in the first country more attractive. Therefore, capital will move from Canada to France in search of higher returns.

As Long as Assets Are Perfectly Substitutable, an Increase in the Interest