Final answer:
Exchange controls are measures used to limit capital outflow from a country by regulating currency exchange. These controls can stabilize the economy by preventing rapid capital flight, but may deter foreign investment and have negative long-term economic effects. The correct option is A.
Step-by-step explanation:
The mechanism put in place to ensure that a substantial amount of capital does not leave a country is exchange controls. Exchange controls are regulatory measures that governments use to limit the ability of individuals and businesses to buy foreign currency with domestic currency, and vice versa. These controls are intended to prevent large, rapid outflows of capital that might occur if investors lose confidence in a country's economy or currency. This could destabilize the economy and lead to further financial difficulties. By controlling the exchange of currency, a nation can maintain greater stability in its financial system.
While import restrictions, such as tariffs and quotas, and other measures like local-content laws, tax controls, and price controls can influence economic activity and protect certain industries, they are not primarily designed to prevent capital flight. Import restrictions are forms of protectionism that increase the cost of foreign goods to encourage domestic production, whereas local-content laws require producers to use a certain amount of domestic materials in their products. Tax controls relate to how taxes are levied within a country, and price controls are measures to set the price levels of goods and services within the domestic market.
It's important to note that while exchange controls may help in the short term, they can also have negative long-term effects on a country's economy. They might discourage foreign investors, who fear they will not be able to convert their profits into their own currency and take them home. Some countries may impose a Tobin tax, which is meant to penalize short-term currency speculation. However, in the interconnected global economy, companies might bypass these controls by operating through countries with fewer restrictions.