Suppose that in a country with exchange controls that the demand for foreign exchange is increasing faster than the supply of foreign exchange. In this case a likely result would be:
A) a depreciating currency.
B) a shortage of foreign exchange.
C) no change in the real exchange rate.
D) that the government needs to increase aggregate demand.
E) that the price level rises rapidly.

Question

Quizplus · Accepted Answer

When demand for foreign exchange exceeds its supply in a country with exchange controls, it typically leads to a shortage of foreign exchange. This is because the controls limit the ability of the exchange rate to adjust freely to balance supply and demand.

Suppose That in a Country with Exchange Controls That the Demand