Page 289 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 25 : International Monetary System

(ii) Which of the following could result from a current account deficit that is too large? Notes
(a) Excessive net outflows of financial assets.
(b) Investment expenditure that is too low.
(c) Difficulties for domestic creditors in collecting their money.
(d) Government spending that is too low.
(e) Growing foreign debt.
(iii) An expenditure switching policy
(a) could have been caused by devaluations or revaluations under the Bretton Woods system.
(b) causes people to switch from saving to spending, thereby allowing the economy to grow.
(c) is unable to restore an external balance and an internal balance at the same time.
(d) alters the level of aggregate expenditure.
(e) will not affect the current account balance.
(iv) The price-specie-flow mechanism
(a) restores external balances through movements of gold, silver or other international forms
of money.
(b) is the practice of selling domestic assets to prevent a current account deficit.
(c) was established in 1900 under the gold standard.
(d) is a commitment by central banks to exchange currency for gold.
(e) Was first described by Adam Smith in 1776.
(v) Which of the following helped to end the gold standard in the 1930s?
(a) An increase in the volume of international trade.
(b) Rapid increases in production that led to deflation with a limited quantity of gold.
(c) Beggar-thy-neighbor trade policies.
(d) Discoveries of gold that led to worldwide inflation.
(e) An insufficient world supply of gold.
25.4 Summary

• International liquidity, as distinguished from developmental capital, is a sum of official foreign
reserves held by the individual countries of the world and the IMF. International liquidity is a
concept related to the balance of payments but not economic development of the countries.
There will, however, be an indirect connexion between international liquidity and economic
development, since the latter is closely related to the balance of payments position of the countries,
particularly of the underdeveloped countries of the so-called Third World.
• A certain level of international liquidity is necessary in order to keep the international trade
and monetary transactions running smoothly. A shortage of international liquidity hampers
international trade expansion, and an excess supply of international liquidity would cause
world monetary expansion and global inflationary upsurge. Today’s world is characterized by
inadequacy of international liquidity rather than excess.
• International liquidity problem can be solved by international arrangements for augmenting
international reserves like gold and reserve assets including the SDRs. This has its own limits
usually associated with supply constraints. The only durable solution to international liquidity
problem particularly of the Third World countries facing monumental balance of payments
deficits, lies in the willingness of the surplus countries of the advanced world to take policy
measures to reduce their balance of payments surpluses. This will make the world less
protectionist as well.
• The period, 1870-1914, was one of international gold standard, relatively free trade and factor
movements, and of stable exchange rates. The inter-war period was characterized by

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