The concept of 'Sudden Stop' in international finance refers to:
A. Only a stop in trade flows
B. A gradual reduction in capital flows
C. An abrupt reversal of capital inflows into a country
D. Only a stop in domestic investment
Answer: Option C
Solution (By JKSSB Mock Tests)
A sudden stop is a large and abrupt reversal of capital inflows, often associated with currency crises, output collapses and balance-sheet problems in emerging markets.
Explanation:
The liquidity effect is the tendency for an exogenous increase in the money supply to lower nominal interest rates in the short run as the supply of loanable funds increases.
Explanation:
The paradox of thrift argues that if everyone tries to save more during a recession, aggregate demand falls, leading to lower income and ultimately lower total saving.
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