Question

Question :A large country imposes capital controls that prohibit foreign borrowing and lending by domestic residents. Analyze the effects on the country’s current account balance, national saving, and investment, and on domestic and world real interest rates. Assume that, before the capital controls were imposed, the large country was running a capital and financial account surplus.

Answer 1

If before the capital controls were imposed, the large country was running a capital and financial account surplus, then this surplus will decrease, current account balance will not change, national saving and investment will increase, domestic real interest rates will increase, and world real interest rates will decrease.