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Q94 (IAS/2015) Economy › External Sector & Trade › Foreign exchange management Official Key

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

Result
Your answer: —  ·  Correct: C
Explanation

The problem of international liquidity is a recognized disadvantage of fixed exchange rate systems[1]. For a currency to be internationalized, key prerequisites include sufficiency in availability and liquidity of that currency[2]. Presently, US Dollar, Euro, Pound Sterling, Yen and Renminbi may be termed 'international currencies'[2].

The problem of international liquidity specifically refers to the shortage or inadequate availability of internationally acceptable reserve currencies needed for cross-border transactions and maintaining balance of payments equilibrium. An international currency is one that is freely available to non-residents, essentially to settle cross-border transactions[3]. When there is insufficient availability of hard currencies like dollars and other internationally accepted currencies, countries face international liquidity problems as they struggle to finance their international trade and meet their external payment obligations. This is distinct from issues related to goods and services, precious metals per se, or exportable surplus.

Sources
  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > Disadvantages of Fixed Exchange Rate System > p. 492
  2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > INTERNATIONALISATION OF RUPEE > p. 500
  3. [3] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Internationalization of Rupee > p. 109
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Q. The problem of international liquidity is related to the non-availability of [A] goods and services [B] gold and silver [C] dollars an…
At a glance
Origin: Mixed / unclear origin Fairness: Moderate fairness Books / CA: 5/10 · 0/10

This is a classic static concept question from the 'External Sector' module. It tests the fundamental definition of 'Liquidity' in economics (means of payment vs. physical goods). It is highly fair and directly sourced from standard NCERT Macroeconomics concepts regarding the Balance of Payments.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Is the problem of international liquidity related to the non-availability of goods and services?
Origin: Weak / unclear Fairness: Borderline / guessy
Indirect textbook clues
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > Disadvantages of Fixed Exchange Rate System > p. 492
Strength: 5/5
“• It gives rise to the problem of international liquidity \qquad \qquad\qquad • It may also lead to recession.\qquad \qquad \qquad • It makes monetary policies ineffective. discourages free market”
Why relevant

States that a fixed exchange rate system "gives rise to the problem of international liquidity," linking the problem to exchange-rate and monetary arrangements rather than physical goods.

How to extend

A student could infer that international liquidity likely concerns availability of international means of payment (reserves/currencies) and check whether scarcity of goods/services fits that monetary definition.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Internationalization of Rupee > p. 109
Strength: 5/5
“• An international currency is one that is freely available to non-residents, essentially to settle cross-border transactions. It is a process that involves increasing use of the local (rupee) currency in cross-border transactions i.e., international markets.”
Why relevant

Defines an international currency as one "freely available to non-residents, essentially to settle cross-border transactions," tying international transactions (liquidity) to currency availability.

How to extend

One could use this to argue international liquidity refers to availability of currencies for payments rather than the physical availability of goods/services.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.1 Introduction > p. 37
Strength: 4/5
“That means the intermediate "commodity" should be such that it is very limited in supply and difficult to get. So, we decided this intermediate "commodity" as gold or silver as both were very limited in supply and started buying and selling of goods in exchange of gold and silver. Such a commodity is called money. This system of gold and silver continued for a long time. But there were problems associated with this also. Suppose there is a country (economy) where people are buying and selling goods and services with the help of the gold coins. If the production of goods and services (GDP) is increasing every year then the country may require more gold coins for transaction of the increased goods and services.”
Why relevant

Explains that when transactions (production of goods and services) increase, more money (gold coins) is required — linking transaction volume to money supply constraints.

How to extend

Extend to international context: rising trade may increase demand for international means of payment (reserves), suggesting liquidity is about payment capacity, not absent goods/services.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.31 Previous Years Questions > p. 117
Strength: 3/5
“Which of the above is/are component/components of Monetary Policy? • (a) (i) only• (b) (ii), (iii) & (iv) only• (c) (i) & (ii) only• (d) (i), (iii) & (iv) only 18. The problem of international liquidity is related to the non-availability of [2015] • (a) Goods and services• (b) Gold and silver• (c) Dollars and other hard currencies• (d) Exportable surplus• 19. There has been a persistent deficit budget year after year. Which of the following actions can be taken by the Government to reduce the deficit? [2015] • (i) Reducing revenue expenditure• (ii) Introducing new welfare schemes• (iii) Rationalizing subsidies• (iv) Expanding industries Select the correct answer using the code given below. • (a) (i) & (iii) only• (b) (ii) & (iii) only• (c) (i) only• (d) (i), (ii), (iii) & (iv) only• 20.”
Why relevant

Contains an exam question listing possible causes of international liquidity problems, which explicitly includes 'Goods and services' as one option among others like 'Dollars and other hard currencies.'

How to extend

A student could use this to note there is some conceptual confusion in sources and then compare which option is supported by monetary definitions (e.g., currencies) versus trade (goods/services).

FUNDAMENTALS OF HUMAN GEOGRAPHY, CLASS XII (NCERT 2025 ed.) > Chapter 8: International Trade > Concerns Concerns Related to International Trade > p. 74
Strength: 3/5
“Undertaking international trade is mutually beneficial to nations if it leads to regional specialisation, higher level of production, better standard of living, worldwide availability of goods and services, equalisation of prices and wages and diffusion of knowledge and culture. International trade can prove to be detrimental to nations of it leads to dependence on other countries, uneven levels of development, exploitation, and commercial rivalry leading to wars. Global trade affects many aspects of life; it can impact everything from the environment to health and well-being of the people around the world. As countries compete to trade more, production and the use of natural resources spiral up, resources get used up faster than they can be replenished.”
Why relevant

States international trade leads to 'worldwide availability of goods and services' as an outcome, emphasising that trade normally supplies goods/services across borders.

How to extend

Use this to reason that shortages of goods/services are typically trade issues; so to test the statement, compare whether international liquidity shortages co‑occur with trade supply disruptions or with payment/reserve shortages.

Statement 2
Is the problem of international liquidity related to the non-availability of gold and silver?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.1 Introduction > p. 37
Presence: 4/5
“That means the intermediate "commodity" should be such that it is very limited in supply and difficult to get. So, we decided this intermediate "commodity" as gold or silver as both were very limited in supply and started buying and selling of goods in exchange of gold and silver. Such a commodity is called money. This system of gold and silver continued for a long time. But there were problems associated with this also. Suppose there is a country (economy) where people are buying and selling goods and services with the help of the gold coins. If the production of goods and services (GDP) is increasing every year then the country may require more gold coins for transaction of the increased goods and services.”
Why this source?
  • Explicitly describes gold and silver as limited-in-supply intermediate commodities used as money.
  • States that economic growth (higher GDP) would require more gold coins for transactions, implying scarcity of gold constrains monetary transactions.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > p. 86
Presence: 4/5
“Also, the issuing authority will have no control over the value of that asset into which the currency can be converted. This other asset most often has been gold, or other national currencies. There are two aspects of this commitment that has affected its credibility — the ability to convert freely in unlimited amounts and the price at which this conversion takes place. The international monetary system has been set up to handle these issues and ensure stability in international transactions. With the increase in the volume of transactions, gold ceased to be the asset into which national currencies could be converted (See Box 6.2).”
Why this source?
  • Explains that national currencies were historically convertible into gold and that rising transaction volumes made gold unsuitable as the conversion asset.
  • Links the inability of gold to handle increased volumes to stresses in the international monetary system (i.e., liquidity problems).
India and the Contemporary World – II. History-Class X . NCERT(Revised ed 2025) > Chapter 3: The Making of a Global World > 4.1 Post-war Settlement and the Bretton Woods Institutions > p. 75
Presence: 3/5
“The international monetary system is the system linking national currencies and monetary system. The Bretton Woods system was based on fixed exchange rates. In this system, national currencies, for example the Indian rupee, were pegged to the dollar at a fixed exchange rate. The dollar itself was anchored to gold at a fixed price of $35 per ounce of gold.”
Why this source?
  • Describes the Bretton Woods system where currencies were pegged to the dollar and the dollar was anchored to gold, showing gold's central role in international liquidity arrangements.
  • By showing gold as the anchor, it implies limitations in gold convertibility impact international liquidity under fixed systems.
Statement 3
Is the problem of international liquidity related to the non-availability of dollars and other hard currencies?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > p. 86
Presence: 5/5
“Although some national currencies have international acceptability, what is important in transactions between two countries is the currency in which the trade occurs. For instance, if an Indian wants to buy a good made in America, she would need dollars to complete the transaction. If the price of the good is ten dollars, she would need to know how much it would cost her in Indian rupees. That is, she will need to know the price of dollar in terms of rupees. The price of one currency in terms of another currency is known as the foreign exchange rate or simply the exchange rate.”
Why this source?
  • Explains that international trade transactions require dollars (or equivalent hard currency) to complete payments.
  • Implies that lack of dollars would directly impede cross-border trade settlement and thus international liquidity.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 13: International Organizations > 1 SDR = 0.434 US Dollar + 0.293 Euro + 0.123 Yuan + 0.076 Yen + 0.074 Pound > p. 398
Presence: 4/5
“There are no notes and coins denominated in SDRs i.e., it is not present in hard currency and is thus called paper gold or notional currency. And SDRs cannot be held by private entities. But the SDR does play a role as an interest-bearing international reserve asset. The allocation of SDRs boosts its member countries' official reserves. While SDRs cannot be used to purchase goods and services directly, countries can exchange them among themselves. Once the SDRs have been added to a member country's official reserves, the country can exchange its SDRs for hard currencies, such as US dollars, Yen, Pound, Yen, Yuan through voluntary trading arrangements with other IMF member countries.”
Why this source?
  • Describes SDRs as reserve assets that countries can exchange for hard currencies like US dollars to boost official reserves.
  • Shows that hard currencies are the practical medium for obtaining usable international liquidity from reserve instruments.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Internationalization of Rupee > p. 109
Presence: 4/5
“• An international currency is one that is freely available to non-residents, essentially to settle cross-border transactions. It is a process that involves increasing use of the local (rupee) currency in cross-border transactions i.e., international markets.”
Why this source?
  • Defines an international currency by its free availability to non-residents for settling cross-border transactions.
  • Emphasises that sufficiency/availability of a currency is central to its role in providing international liquidity.
Statement 4
Is the problem of international liquidity related to the non-availability of exportable surplus?
Origin: Weak / unclear Fairness: Borderline / guessy
Indirect textbook clues
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.31 Previous Years Questions > p. 117
Strength: 4/5
“Which of the above is/are component/components of Monetary Policy? • (a) (i) only• (b) (ii), (iii) & (iv) only• (c) (i) & (ii) only• (d) (i), (iii) & (iv) only 18. The problem of international liquidity is related to the non-availability of [2015] • (a) Goods and services• (b) Gold and silver• (c) Dollars and other hard currencies• (d) Exportable surplus• 19. There has been a persistent deficit budget year after year. Which of the following actions can be taken by the Government to reduce the deficit? [2015] • (i) Reducing revenue expenditure• (ii) Introducing new welfare schemes• (iii) Rationalizing subsidies• (iv) Expanding industries Select the correct answer using the code given below. • (a) (i) & (iii) only• (b) (ii) & (iii) only• (c) (i) only• (d) (i), (ii), (iii) & (iv) only• 20.”
Why relevant

Shows the exact exam-style formulation linking 'problem of international liquidity' to several possible causes including 'exportable surplus' (puts the two concepts in the same diagnostic frame).

How to extend

A student could read this alongside definitions of 'exportable surplus' to ask whether lacking exportable surplus would reduce foreign exchange inflows and thus international liquidity.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > WHICH EXCHANGE RATE SYSTEM SUITS AN ECONOMY BEST? > p. 494
Strength: 5/5
“For small economies with a dominant trading partner that maintains a reasonably stable monetary policy, fixed exchange rate system is suitable. And this has been found to be true internationally in the case of many small economies like small Caribbean islands, small Central American countries and small Pacific Island countries. Currencies of Nepal and Bhutan are also pegged to the Indian Rupee. Moreover, currencies of Africa, Namibia, Swaziland, etc., are pegged to the South African Rand. Moreover, economies with huge export surplus and enormous forex reserves like China are able to follow a fixed exchange rate regime. The other available options are free float and managed float.”
Why relevant

States that economies with huge export surplus and enormous forex reserves can follow a fixed exchange rate—implicitly linking export surplus to accumulation of foreign exchange reserves (a component of international liquidity).

How to extend

Use the general fact that export surplus → forex earnings → reserves, so lack of exportable surplus could imply weaker reserves and hence lower international liquidity.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > Disadvantages of Fixed Exchange Rate System > p. 492
Strength: 4/5
“• It gives rise to the problem of international liquidity \qquad \qquad\qquad • It may also lead to recession.\qquad \qquad \qquad • It makes monetary policies ineffective. discourages free market”
Why relevant

Identifies 'problem of international liquidity' as an issue arising under certain exchange-rate regimes (fixed rates), tying liquidity concerns to balance-of-payments dynamics rather than a single domestic factor.

How to extend

Combine with the export-surplus → reserves link to evaluate whether lack of exportable surplus would worsen liquidity especially under fixed-rate regimes that require reserves.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 2.1. Balance of Visibles or Balance of Trade (BOT) > p. 472
Strength: 4/5
“Indian Economy If exports are >imports, then there occurs trade surplus. If exports are <imports, then there occurs trade deficit. If exports = imports, then there is trade equilibrium. Note: Export and import of even capital goods like plant and machinery is included under BOT and not under capital account. Note: As per IMF manual, the value of imports and the value of exports should be considered on Free-On-Board (FOB) basis.<br>However due to data constraint in the formular pump - feller rejection ble for shippin. However, due to data constraints, in India, imports are considered on CIF amount, i.e., cost + insurance + freight.”
Why relevant

Defines trade surplus/deficit in terms of exports vs imports, providing the basic concept of 'exportable surplus' as the source of a trade surplus (foreign exchange inflow).

How to extend

A student can use this to reason that non-availability of exportable surplus implies trade deficits or no surplus, reducing export earnings that contribute to international liquidity.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > INTERNATIONALISATION OF RUPEE > p. 500
Strength: 3/5
“Indian rupee will be termed as 'internationalised' if: • Banks, firms and residents of another country start holding it for financial security.• It is accepted in international trade transactions. • Non-residents are eager to invest in rupee-denominated assets, etc. Pre-requisites of internationalisation of any currency include: • 1. Sufficiency in the availability of that currency. • 2. Stability of that currency. • 3. Liquidity of that currency. Presently, US Dollar, Euro, Pound Sterling, Yen and Renminbi may be termed 'international currencies'. Nepal or Bhutan hold India rupee along with their own official currencies (Nepalese Rupee and Bhutanese Ngultrum, respectively) for financial security and for cross-border trade.”
Why relevant

Lists 'sufficiency in the availability of that currency' and 'liquidity of that currency' as prerequisites for a currency's international role, linking currency availability/liquidity to international transactions.

How to extend

Interpret 'availability' of foreign currency as tied to export earnings; thus insufficient exports could reduce availability/liquidity of foreign exchange.

Pattern takeaway: UPSC frequently sets traps by mixing 'Real Sector' options (Goods, Export Surplus) with 'Monetary Sector' options (Currency, Gold). The pattern is to test if you understand that financial crises are often about the *mechanism of payment*, not the *availability of products*.
How you should have studied
  1. [THE VERDICT]: Sitter. Directly solvable via NCERT Macroeconomics (Chapter 6: Open Economy) or any standard economy primer (Vivek Singh/Singhania).
  2. [THE CONCEPTUAL TRIGGER]: The 'International Monetary System' theme. Specifically, the transition from the Gold Standard to the Bretton Woods system (Dollar dominance).
  3. [THE HORIZONTAL EXPANSION]: Memorize these siblings: Triffin Dilemma (the paradox of reserve currency), SDR (Paper Gold) composition (USD, Euro, Yuan, Yen, Pound), Reserve Tranche Position (RTP), and the difference between NEER vs REER.
  4. [THE STRATEGIC METACOGNITION]: Focus on vocabulary precision. In Economics, 'Liquidity' always refers to the medium of settlement (Cash/Currency), never the commodity being traded (Goods/Services). Distinguish the 'Real Sector' from the 'Monetary Sector'.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 International liquidity — causes and context
💡 The insight

References link 'international liquidity' to exchange rate regimes and foreign exchange availability rather than to goods/services availability.

Understanding what 'international liquidity' means (shortage of usable international reserves/hard currency and its links to fixed exchange rates, external liabilities and foreign-exchange flows) is high-yield for UPSC questions on balance-of-payments, exchange rate regimes and external sector policy. Master this concept to answer questions that distinguish monetary/reserve problems from real shortages of goods and services; study by mapping causes (fixed exchange rates, reserve movements, external debt) to policy remedies (adjustment, reserve creation, currency internationalization).

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > Disadvantages of Fixed Exchange Rate System > p. 492
  • Geography of India ,Majid Husain, (McGrawHill 9th ed.) > Chapter 11: Industries > INDUSTRIAL PROBLEMS OF INDIA > p. 83
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Internationalization of Rupee > p. 109
🔗 Anchor: "Is the problem of international liquidity related to the non-availability of goo..."
📌 Adjacent topic to master
S1
👉 Money supply constraints under commodity-money systems
💡 The insight

Text on gold/silver as money highlights how limited monetary medium can constrain transactions when output rises — a liquidity-type problem tied to money, not goods.

Helps aspirants link historical/structural money issues (gold standard) to modern liquidity concerns; useful for questions contrasting real shortages vs monetary/transactional constraints. Prepare by revising money definitions, gold-standard mechanics, and implications for transaction demand and price/quantity adjustments.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.1 Introduction > p. 37
🔗 Anchor: "Is the problem of international liquidity related to the non-availability of goo..."
📌 Adjacent topic to master
S1
👉 Availability of goods & services in international trade
💡 The insight

References discuss worldwide availability and consequences of international trade, clarifying that availability of goods/services is a trade/outcome issue distinct from monetary/reserve liquidity.

Crucial to separate real-sector (trade, production, availability) issues from monetary/external-sector (liquidity, reserves) issues in UPSC answers. Study by linking comparative advantage, trade benefits/risks and how trade affects availability versus how reserves affect payment ability.

📚 Reading List :
  • FUNDAMENTALS OF HUMAN GEOGRAPHY, CLASS XII (NCERT 2025 ed.) > Chapter 8: International Trade > Concerns Concerns Related to International Trade > p. 74
  • FUNDAMENTALS OF HUMAN GEOGRAPHY, CLASS XII (NCERT 2025 ed.) > Chapter 8: International Trade > Why Does International Trade Exist? > p. 72
🔗 Anchor: "Is the problem of international liquidity related to the non-availability of goo..."
📌 Adjacent topic to master
S2
👉 Gold standard and international liquidity
💡 The insight

References show gold/silver were the limited-supply assets backing money and that growth increased demand for these metals, constraining available money.

High-yield topic for UPSC: explains historical causes of global liquidity constraints and transition away from commodity-backed money. Connects to money supply, balance of payments, and monetary policy. Study textbook treatments of the gold standard and practice questions on its implications.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.1 Introduction > p. 37
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > p. 86
🔗 Anchor: "Is the problem of international liquidity related to the non-availability of gol..."
📌 Adjacent topic to master
S2
👉 Fixed exchange rate systems & liquidity constraints (Bretton Woods)
💡 The insight

Evidence links fixed-rate regimes and the dollar–gold anchor to international liquidity problems and eventual system collapse.

Frequently tested in GS and optional papers on why Bretton Woods collapsed and differences between fixed vs flexible rates. Helps answer questions on IMF, exchange regimes, and reform of the international monetary system. Revise case studies (Bretton Woods), NCERTs, and policy implications.

📚 Reading List :
  • India and the Contemporary World – II. History-Class X . NCERT(Revised ed 2025) > Chapter 3: The Making of a Global World > 4.1 Post-war Settlement and the Bretton Woods Institutions > p. 75
  • India and the Contemporary World – II. History-Class X . NCERT(Revised ed 2025) > Chapter 3: The Making of a Global World > 4.4 End of Bretton Woods and the Beginning of 'Globalisation' > p. 77
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > Disadvantages of Fixed Exchange Rate System > p. 492
🔗 Anchor: "Is the problem of international liquidity related to the non-availability of gol..."
📌 Adjacent topic to master
S2
👉 Reserve currency availability and liquidity
💡 The insight

One reference lists sufficiency and liquidity of a currency as prerequisites for internationalisation, and another notes monetary gold as part of reserves.

Useful for questions on internationalisation of currencies, reserve management and balance of payments. Links to RBI/IMF roles and contemporary debates on reserve currencies. Prepare by reading chapters on foreign exchange, reserves, and currency internationalisation.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > INTERNATIONALISATION OF RUPEE > p. 500
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 2.1. Balance of Visibles or Balance of Trade (BOT) > p. 472
🔗 Anchor: "Is the problem of international liquidity related to the non-availability of gol..."
📌 Adjacent topic to master
S3
👉 Role of hard currencies (e.g., US dollar) in settling international transactions
💡 The insight

References show cross-border trade is settled in hard currencies and that lack of such currencies hinders transactions — core to the stated liquidity problem.

High-yield for UPSC: questions often probe why dollars dominate reserves and how currency shortages affect trade and balance of payments. Connects to foreign exchange, reserves, and external debt topics. Master by studying examples of transaction settlement, reserve composition, and implications for trade/FX policy.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > p. 86
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 13: International Organizations > 1 SDR = 0.434 US Dollar + 0.293 Euro + 0.123 Yuan + 0.076 Yen + 0.074 Pound > p. 398
🔗 Anchor: "Is the problem of international liquidity related to the non-availability of dol..."
🌑 The Hidden Trap

The Triffin Dilemma. This is the economic paradox where the country issuing the global reserve currency (USA) must run persistent trade deficits to supply the world with liquidity (Dollars), which eventually undermines confidence in the dollar's value. This is the theoretical parent of the 'International Liquidity' problem.

⚡ Elimination Cheat Code

Use 'Wallet Logic'. If you say, 'I have a liquidity problem' in your personal life, it means you don't have *cash* to pay bills. It doesn't mean you don't have furniture (Goods) or skills (Services). Options A (Goods) and D (Surplus) describe assets/products, not cash. Option B (Gold) is archaic (pre-1971). Option C (Dollars) is the modern 'global cash'.

🔗 Mains Connection

Mains GS-2 (IR) & GS-3 (Economy): Link this to 'De-dollarization'. The current geopolitical push for trade in local currencies (Vostro accounts) and a potential BRICS currency is a direct attempt to solve the 'Problem of International Liquidity' by reducing dependence on the US Dollar.

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