Macroeconomic Protections Against Financial Crisis

Short-term foreign borrowings are highly volatile ('hot money'). If a crisis hits, investors pull out short-term funds immediately, causing currency depreciation and capital flight. Avoiding reliance on them grants immunity (Statement 1 is correct). Opening up to more foreign banks and maintaining full capital account convertibility integrates the economy more tightly with global financial markets, increasing vulnerability to global contagion (Statements 2 and 3 are incorrect). > One-line conceptual takeaway: Capital controls and a low reliance on volatile short-term external debt act as critical shock absorbers during global financial crises. Answer: (a).