UPSC Prelims 2015 · Question 94 of 98
UPSC Prelims 2015 question on International Liquidity
- ExamUPSC CSE
- Year2015
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicExternal Sector of India
- DifficultyMedium
- TypeDirect
The problem of international liquidity is related to the non-availability of
Show answer
Answer: C. dollars and other hard currencies
Verdict
The answer is dollars and other hard currencies. International liquidity concerns the adequacy of reserves in widely accepted currencies.
Analysis
International liquidity refers to the adequacy of a country's, or the world's, international reserves for settling external obligations, and those reserves are held in hard currencies that other countries will readily accept. Under the Bretton Woods system this was a structural problem, because world liquidity depended on the United States running a deficit to supply dollars, the difficulty known as the Triffin dilemma. Goods and services and exportable surplus concern trade capacity rather than reserves, and gold alone ceased to be the basis of settlement after Bretton Woods ended.
Source
Reference material on international liquidity.
How to crack it
Decode the term literally. Liquidity anywhere in economics means the ability to settle obligations immediately, so international liquidity must mean the means of settling international obligations, which is reserves rather than production. Whenever a familiar economic word is prefixed with international, apply the domestic meaning to the external account and the definition usually falls out. That approach also handles international reserves, international investment position and external debt.