Imperfect asset substitutability assumes:
A) the returns on foreign and domestic currency bonds are the same.
B) the returns on foreign and domestic currency are unrelated.
C) the returns on foreign and domestic currency are not influenced by risk.
D) sterilized intervention proves to be unproductive.
E) the returns on foreign and domestic currency are different, but both are influenced by risk.

Question

Quizplus · Accepted Answer

Imperfect asset substitutability assumes that the returns on foreign and domestic currency are different but influenced by risk. This means that investors do not see them as perfect substitutes and that small differences in risk and return can influence their decision-making process. The other choices are not related to the concept of imperfect asset substitutability.

Imperfect Asset Substitutability Assumes