Which of the following is a characteristic of the 'Risk-Sharing' benefits of international financial integration?
A. Only closed economies can smooth consumption
B. Countries can smooth consumption in the face of idiosyncratic shocks by trading claims on future output
C. Integration always increases consumption volatility
D. Risk-sharing is irrelevant for welfare
Answer: Option B
Solution (By JKSSB Mock Tests)
International risk-sharing allows countries to diversify away country-specific income shocks by holding foreign assets, thereby reducing the volatility of national consumption relative to national output.
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