Canada can be categorized as a small open economy with perfect capital mobility

Question

Canada can be categorized as a small open economy with perfect capital mobility - that is, changes in the Canadian economy will have only a slight effect, if any, on the prices of goods and services, and on interest rates, in the rest of the world.

Which of the following statements about capital mobility is correct? Check all that apply.

1. Perfect capital mobility implies that Canadians have full access to world financial markets (true/false)

2. Perfect capital mobility implies that people in the rest of the world have full access to the Canadian financial market (true/false)

3. Since Canada is a small open economy with perfect capital mobility, the Canadian real interest rate must be greater than the world interest rate (true/false)

Suppose the world interest rate is equal to 3% while the Canadian real interest rate is 6%. Because of perfect capital mobility, Canadian _______ (borrowers/savers) would prefer to _______ (buy foreign assets that pay/borrow from foreigners at) an interest rate of 3%. Given this, we would expect Canadian ______ (savers/borrowers) to offer to ________ (borrow/lend) at a rate of _____%

Thanks guys!! Really appreciate the help.

Explanation / Answer

true true false

borrowers

borrow from foreigners at

savers

lend

6%

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