Question

Exchange controls are most likely imposed by a country when?

1) when there is a substantial amount of capital leaving the country
2) when it is required that a portion of any product sold within the country contain locally made parts
3) when there are no adequately developed sources of supply within the country
4) when there is a drop in the price of essential products that command considerable public interest in the country
5) when there is an abundance of foreign exchange in the country

Answer 1

Exchange controls are typically imposed when there is a risk of a substantial capital outflow that could destabilize the country's currency and economy.

Step-by-step explanation:

Exchange controls are most likely imposed by a country when there is a substantial amount of capital leaving the country. These controls are a form of regulatory measures that a government can take to manage and restrict the flow of foreign capital, particularly in cases where such outflows may lead to a depreciation of the domestic currency.

The central bank may be concerned about the exchange rate because movements in the rate affect the aggregate demand in an economy, and frequent, substantial fluctuations can disrupt international trade and cause problems in the banking system. Countries may implement exchange controls to mitigate the impact of large inflows of international financial capital that could potentially reverse and lead to an economic downturn.

In general, exchange controls are most likely imposed by a country when there is a substantial amount of capital leaving the country. This is option 1. When there is an outflow of capital, it can lead to a decline in the country's currency and potentially cause problems in the banking system and overall economy, as mentioned in the provided information.