With greater capital mobility, the real U.S. and foreign interest rates will tend to be equalized if
A)the differences between U.S. and foreign inflation rates are zero
B)the differences between U.S. and foreign inflation rates are positive
C)after differences in expected inflation and expected changes in exchange rates and the uncertainty of these changes have been taken into account
D)Both a and b are correct.

Question

Quizplus · Accepted Answer

With greater capital mobility, investors will move funds across borders to achieve higher returns, equalizing interest rates between countries. However, the effects of differences in inflation rates and exchange rate changes need to be taken into account when considering the real interest rate. Therefore, choice C correctly states that after expected inflation and exchange rate changes are factored in and their uncertainty is considered, real interest rates will tend to be equalized.

With Greater Capital Mobility, the Real U