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Chapter 14: Problem 6

What is the purpose of capital controls?

Short Answer

Expert verified
The purpose of capital controls is to maintain and foster financial stability within a nation's economy. They aim to protect the country's financial systems from external shocks, control exchange rates, manage inflation, and reduce the risk of financial crises. They work by imposing measures such as taxes, tariffs, or volume restrictions on the flow of foreign capital into and out of an economy.

Step by step solution

01

Define Capital Controls

Capital controls are measures implemented by governments or central banks to restrict or regulate the flow of foreign capital in and out of a country's economy. These measures can include taxes, tariffs, legislation, or volume restrictions, and they can apply to the flow of capital into the country (inflow) or out of the country (outflow). These controls are implemented to help manage an economy's financial stability.
02

Explain The Main Purposes

The main purposes of capital controls include: maintaining financial stability, shielding the domestic economy from external economic shocks, controlling exchange rates, reducing the risk of financial crises, managing inflation, and maintaining a strategic balance of power. All of these aims serve the overarching goal of protecting and fostering a nation's economic prosperity.
03

Give Examples

An example of capital controls might be a government imposing a tax on the capital flowing out of the country to discourage domestic-based companies from investing excessively in foreign assets. This keeps more money within the country and works to stabilize the economy.

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