What Is the Implication of Perfect Capital Mobility for a Small

question 171

Multiple Choice

What is the implication of perfect capital mobility for a small open economy like Canada's?

• A)The real interest rate in Canada should exceed the real interest rate prevailing in world financial markets.
• B)The real interest rate in Canada should equal the real interest rate prevailing in world financial markets.
• C)The real interest rate in Canada should be less than the real interest rate prevailing in world financial markets.
• D)The real interest rate is irrelevant for capital mobility.

---

Definitions:

Capital Investment

Capital investment refers to funds invested in a business with the expectation of achieving long-term benefits, typically in the form of physical assets like machinery or buildings.

Rate of Return

The profit or deficit achieved from an investment within a certain timeframe, described as a proportion of the investment's initial value.

Net Annual Cash Inflow

The difference between the total cash inflows and outflows of a business over a one-year period.

Internal Rate of Return

A metric used in finance to estimate the profitability of potential investments, calculating the rate of return where the net present value of all cash flows is equal to zero.