The domestic real interest rate (r)for a given country must be the same as the world real interest rate (r^w)________. A)only if capital is not perfectly mobile B)because with no barriers to capital flows,if r^w r domestic residents would just lend abroad putting upward pressures on the domestic rate until both rates equal each other C)because with no barriers to capital flows,if r^w

Question

The domestic real interest rate (r)for a given country must be the same as the world real interest rate (r^w)________. A)only if capital is not perfectly mobile B)because with no barriers to capital flows,if r^w > r domestic residents would just lend abroad putting upward pressures on the domestic rate until both rates equal each other C)because with no barriers to capital flows,if r^w < r domestic residents would only lend to foreigners putting downward pressures on the domestic rate until both rates equal each other D)all of the above E)none of the above

Quizplus · Accepted Answer

The statement in option B is correct. In the absence of barriers to capital flows, if the world real interest rate is higher than the domestic real interest rate, domestic residents would want to lend abroad to earn a higher return. This capital outflow would lead to an increase in the supply of loanable funds in the domestic market, which would put upward pressure on the domestic real interest rate. Conversely, if the world real interest rate is lower than the domestic real interest rate, domestic residents would only want to lend to foreigners at a lower rate of return, resulting in a decrease in the supply of loanable funds in the domestic market and putting downward pressure on the domestic real interest rate. Thus, in both cases, the domestic real interest rate would adjust until it reaches the world real interest rate, which is the equilibrium condition. Therefore, the correct answer is B.

The Domestic Real Interest Rate (R)for a Given Country Must