A large country imposes capital controls that prohibit foreign borrowing and lending by domestic residents.The country is currently running a capital and 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

The imposition of capital controls will limit the ability of domestic residents to borrow and lend internationally, leading to a decrease in the supply of loanable funds domestically. This will cause real domestic interest rates to rise as the demand for funds remains unchanged or increases.

A Large Country Imposes Capital Controls That Prohibit Foreign Borrowing