Many economies impose restrictions on international capital flows,assuming that

Question

Many economies impose restrictions on international capital flows,assuming that such restrictions limit the scope for arbitrage between domestic and foreign bonds, thereby effectively making such bonds poorer substitutes for each other, explain how the intensification of capital flow restrictions would affect the BB curve. Many economies impose restrictions on international capital flows,assuming that such restrictions limit the scope for arbitrage between domestic and foreign bonds, thereby effectively making such bonds poorer substitutes for each other, explain how the intensification of capital flow restrictions would affect the BB curve.

Explanation / Answer

Assuming that BB curve means the curve for net capital inflow.

Intensification of capital flow restrictions would restrict the inflow of capital of capital from foreign countries, thus will decrease the net capital inflow.

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