Which of the following is a characteristic of the 'Sudden Stop' literature?
A. Only trade shocks matter
B. Abrupt reversals of capital inflows can cause large real depreciations, output collapses and financial crises
C. Capital-flow reversals are always gradual and benign
D. Capital flows never reverse
Answer: Option B
Solution (By JKSSB Mock Tests)
Sudden-stop models analyse the macroeconomic and financial consequences of large and abrupt reversals in capital inflows, which often trigger currency crises, credit contractions and sharp recessions.
Explanation:
The New Keynesian Phillips Curve is derived from models with staggered price setting and rational expectations, linking current inflation to expected future inflation and the output gap or marginal cost.
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