What are capital controls? Why might a financial crisis lead to a ...

[tuffie]

What are capital controls? Why might a financial crisis lead to a reconsideration of using capital controls, and what problems might result from the reinstatement of capital controls?
 
  What will be an ideal response?

Question 2

Refer to Scenario 1-1. Using marginal analysis terminology, what is another economic term for the incremental cost of producing the last 3,000 cell phones?
 
  A) operating cost B) marginal cost
  C) explicit cost D) Any of the above terms are correct.

[Brummell1998]

Answer to Question 1

Capital controls refer to limits on the flow of foreign financial exchange and financial investments across countries. With the globalization of financial markets, financial securities issued in one country are held by investors and firms in many other countries. If a financial crisis causes those securities to decline in value, the financial pain will be widely distributed. The globalization of financial markets has helped increase growth and efficiency in the world economy. This allows for the savings of households around the world to be channeled to the best investments available. It is also possible for firms in nearly every country to tap the savings of foreign households to gain the funds needed for expansion. No longer are firms forced to rely only on the savings of domestic households to finance investment, as they would be with the reinstitution of capital controls.

Answer to Question 2

B