IAI Actuarial Core Principles · Business Economics · Globalisation and multinational business
Which of the following best describes a cost of globalisation for an economy through financial integration?
Greater exposure to sudden capital outflows is the cost, since open financial markets let foreign funds leave quickly and destabilise the currency and banking system. Cheaper capital, diversification, policy discipline and more infrastructure funding are usually regarded as benefits.
- AGreater exposure to sudden capital outflows that can destabilise the currency and financial systemCorrect
- BLower cost of raising capital through access to international investors
- CWider diversification opportunities for domestic investors
- DImproved discipline on domestic economic policy
- Larger pool of funds for infrastructure investment
Explanation
Open capital markets allow rapid withdrawal of funds in a crisis, which can cause currency depreciation and financial stress. The other options are generally cited as benefits of financial integration.
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