Question

Perfect capital mobility that both domestic monetary and fiscal policy lose control over the interest rate. Discuss the effects of the policy under the fixed exchange rate and flexible exchange rate systems. Is perfect capital mobility relevant for your country? Why? What is your country?

20 Marks

Answer 1

Perfect capital mobility means that the availability of capital is given as per the need of the producer.
Perfect capital mobility is that both domestic monetary and fiscal policy lose control over the interest rate it means when an investor can shift the capital as per the interest rate in the market then the investor has a choice to invest in which project.
Project investment is totally based on the rate of return and therefore it is a good policy to invest as per the requirement. So, if the interest rate will decrease in the economy then it will raise the capital requirement and if the interest rate will increase in the economy then the capital requirement will less.
The monetary policy includes various things like bank rate, open market operations, cash reserve ratio, statutory liquidity ratio factors also play an important role in the availability of capital in the economy.
Fiscal policy means the policy which is available when the condition is in an inflation or deflation situation where the government can increase their tax rate or the government can change its expenditure also.
The Policy under fixed exchange rate and flexible exchange rate is different. In the fixed exchange rate parties are agreed on a particular exchange rate and they follow this rate up to a certain period of time but under flexible exchange rate the policies as per the demand and supply of the capital in the market.
Perfect capital mobility is relevant for our country because it is beneficial for all types of investors and producers in the market based on the interest factor for investment.