Explain the problems with exchange rate controls.

What will be an ideal response?

Exchange rate controls or rationing would require foreign currency obtained in a trade transaction to be sold to the government. Foreign currency needed for an import transaction would be bought from the government. The government would ration foreign currency to meet currency exchange needs.
Exchange controls have the same problems as other types of price controls in a competitive market. First, they create inefficiencies. In this case, they shift trade patterns away from those based on the efficiency gains from comparative advantage. Second, rationing systems are subject to abuse. Importers must obtain foreign currency from the government to pay for imports. The government must ration this currency, and the rationing of currency can be based on favoritism or discrimination. Third, price controls limit consumer choice. Exchange controls restrict consumers from opportunities to purchase desired foreign goods even if they are willing to pay a higher price for the product, and they must settle for a domestic product. Fourth, price controls can create black markets. This occurs in foreign exchange markets when importers are willing to pay more than the going government rate to obtain needed foreign currency.