How does a weak financial sector intensify the problems created ...

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How does a weak financial sector intensify the problems created by volatile capital flows?
 
  What will be an ideal response?

Question 2

Which of the following is FALSE about intraindustry trade?
 
  A) Intraindustry trade creates gains from trade.
  B) Intraindustry trade is due to comparative advantage.
  C) Intraindustry trade may involve heightened competition and lower prices for consumers.
  D) Intraindustry trade increases consumer choice.

[djpooyouma]

Answer to Question 1

For example, consider a banking sector that borrows internationally and lends locally. If the funds obtained in the international market are short-term and are used to fund long-term loans such as real estate, problems arise when the international loans must be repaid. If lenders believe that there is a problem with a borrowing bank, they refuse to roll over the debt, creating a liquidity problem if the bank's assets are tied up in real estate loans. In the short run, real estate is relatively illiquid and cannot be used to make a payment. When a number of banks are confronted with similar problems, their attempt to unload real estate depresses prices even further and undermines the solvency of the banking system since every bank with real estate investments is suddenly holding a portfolio of declining value. In turn, this reduces the ability of the banking system to lend, which further reduces investment and consumption.

Answer to Question 2

B

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TYSM

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