Question 19 from UPSC CSE 2015 - Economy

Question

The problem of international liquidity is related to the non-availability of

IASCODEX · Accepted Answer

Correct Option: C. dollars and other hard currencies

Strategy: Focus on 'international liquidity'—this specifically relates to the ability of countries to settle international payments. The mention of 'liquidity' in an international context points directly to the availability of foreign exchange, mainly US dollars and other hard currencies, not physical goods, gold, or exports. So, select the option that references global means of payment.

Key Info: International liquidity refers to the stock of international means of payment available to countries to finance deficits in their balance of payments. Traditionally, these means include:

- Reserve currencies, especially the US dollar, which acts as the primary medium for global transactions.
- Hard currencies are those that are widely accepted around the world, stable, and easily convertible, such as the US dollar, euro, pound sterling, and Japanese yen.
- Under the Bretton Woods system (1944–1971), the US dollar and gold served as key sources of international liquidity. Declining US gold reserves and dollar shortages or excesses led to periodic liquidity crises.
- The International Monetary Fund (IMF) was set up to help address international liquidity problems by providing short-term financial assistance and later creating Special Drawing Rights (SDRs) as supplementary reserve assets.
- The issue of international liquidity does not relate directly to the supply of goods and services, gold and silver (as commodities), or the mere presence of exportable surplus in a country, but rather to a country's ability to access widely accepted means for settling international debts.

IASCODEX · Answer

Option A: goods and services

IASCODEX · Answer

Option B: gold and silver

IASCODEX · Answer

Option D: exportable surplus