Explanation

Capital controls on inflows are typically implemented to:

• Limit the amount of foreign capital entering the country
• Reduce pressure on the domestic currency to appreciate
• Maintain export competitiveness by preventing an overly strong currency

Why governments implement capital inflow controls:

1. Prevent currency overvaluation - Strong appreciation can hurt export industries
2. Reduce speculative bubbles - Excessive capital inflows can create asset price bubbles
3. Maintain monetary policy independence - Large capital inflows can complicate domestic monetary policy

Incorrect options:

• Option A: Capital controls on inflows would typically increase foreign exchange reserves as the central bank intervenes to prevent appreciation
• Option B: Controls on outflows would be used to prevent currency depreciation, not controls on inflows

Correct Answer: C - Prevent the currency from appreciating too strongly.