The domestic real interest rate (r)for a given country must be the same as the world real interest rate (rw)________. A)only if capital is not perfectly mobile B)because with no barriers to capital flows,if rw 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 rw

Question

The domestic real interest rate (r)for a given country must be the same as the world real interest rate (rw)________.
A)only if capital is not perfectly mobile
B)because with no barriers to capital flows,if rw > 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 rw < 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

With perfect capital mobility, capital flows will occur until the domestic interest rate equals the world interest rate. This is because investors will seek the highest return on investment, so they will move their funds to the location offering the highest yield until the rates equalize. Therefore, the domestic real interest rate must be the same as the world real interest rate.

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