Question

If the domestic interest rate in a small open economy with perfect capital mobility is higher than the world interest rate, then ______ would drive the domestic interest rate back to the level of the world interest rate. the government capital inflow capital outflow a decline in domestic saving

Answer 1

Answer: capital inflow

Explanation:

Capital flows is the movement of money for investment purpose, trade or business production, and it includes the flow of capital in corporations in the form of investment capital and capital spending on research development and operations.

On a larger scale, the government directs capital flows from tax into operations and programs and through trade with other countries and currencies. When the domestic interest rate in an open economy which is small with perfect capital mobility is greater than the world interest rate, the domestic interest rate would be driven back to the world interest level by the capital inflow.