A Large Country Imposes Capital Controls That Prohibit Foreign Borrowing

question 100

Multiple Choice

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.

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Definitions:

Cash Flows

Cash flows refer to the net amount of cash and cash-equivalents being transferred into and out of a business.

NPV (Net Present Value)

A method used in capital budgeting to evaluate the profitability of an investment or project, calculated by subtracting the total present values of cash outflows from the total present values of cash inflows.

IRR (Internal Rate of Return)

A financial metric used to estimate the profitability of potential investments, calculated as the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Discount Rate

The interest rate charged to commercial banks and other financial institutions for loans received from the central bank's discount window.