A large country imposes capital controls that prohibit foreign borrowing and lending by domestic residents.The country is currently running a financial account surplus.The imposition of the capital controls will cause
A)net exports to decrease.
B)real domestic interest rates to rise.
C)real world interest rates to rise.
D)desired national saving to fall.

Question

Quizplus · Accepted Answer

Capital controls that prohibit foreign borrowing and lending lead to a decrease in the supply of loanable funds domestically. This decrease in supply, with demand remaining constant, causes real domestic interest rates to rise as the market adjusts to the new restrictions on capital movement.

A Large Country Imposes Capital Controls That Prohibit Foreign Borrowing