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Essay / Research Paper Abstract
This 4 page paper answers questions set by the student, looking at issues concerning interest rates in an open economy. The first question looks at what is meant by capital mobility and the concept of perfect and imperfect mobility. The way in which discrepancies between international and domestic interest rates may impact on the balance of payments is discussed and the potential advantages and disadvantages of increasing rates in the US at the beginning of 2011 are considered. The bibliography cites 4 sources.
Page Count:
4 pages (~225 words per page)
File: TS14_TEopenint.doc
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Unformatted sample text from the term paper:
mobility refers to a situation where there are no barriers to the movement of capital across national boarders. This does not include barriers to prevent money laundering taking place.
However, in many countries there are measures in place that seek to limit the flow of capital, for example, limiting the level of international investment in specific areas of the
economy. For example, a requirement for permission to be gained before brining money into an economy is a barrier. Where there is not total freedom without any barriers there is
imperfect capital mobility. Question 2 In a simple model of the open economy it is assumed that the international interest rates will be the same as the domestic interest
rate. Where these are not equal it will impact on the balance of payments. The balance of payments is the balance of financial transaction between the home countries and other
nations, with money coming into and out of the economy. If the domestic interest rate is greater than the domestic interest rate there will be an inflow of capital
from other countries investors who are seeking to maximise their investment returns, moving it in order to take advantage of the better rates. However, companies within the domestic economy
may seek to take their borrowing requirements elsewhere, where there are lower costs associated with borrowing with the lower interest rates (Baye, 2007). This is likely to result in a
net inflow of capital. Higher interest rates may also reduce domestic borrowing, such as on credit cards and business loans, and may reduce the aggregate demand in an economy and
may also reduce the demand for imports. Where the domestic rate of interest is lower that that the international rate the opposite will occur, the domestic investors may look
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