ntrols on imports and/or foreign exchange dealing has been one of the arguments used in maintaining fixed exchange rate. What problems might arise if the government were to adopt this method of maintaining a fixed exchange
Controls on imports and/or foreign exchange dealing has been one of the arguments used in maintaining fixed exchange rate. What problems might arise if the government were to
adopt this method of maintaining a fixed exchange rate?
A fixed exchange rate does not represent the true value of a currency. A country needs a huge amount of reserves to engage in foreign exchange dealings. Otherwise, rapid devaluation can take place, which leads to capital flight. Import controls might make the currency stable in the short run, but it also increases the price of those goods which are imported. If those goods are essential, then this can lead to an unsustainable level of inflation. Inflation puts downward pressure on the currency.
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