Correct Option
The problem of international liquidity refers to the non-availability or shortage of universally accepted reserve assets that countries can use to settle international transactions, finance balance of payments deficits, and maintain currency stability. In the modern global financial system, these assets primarily consist of major convertible currencies, commonly known as 'hard currencies,' such as the US dollar, Euro, Japanese Yen, and British Pound. These currencies are widely accepted for international trade, investment, and debt servicing due to their stability and global acceptance. A scarcity of such hard currencies can impede global economic activity and create financial instability. The International Monetary Fund (IMF) introduced Special Drawing Rights (SDRs) as an international reserve asset to supplement member countries' official reserves and address potential international liquidity shortages.
Incorrect Options
Option (1) goods and services: International liquidity pertains to financial assets and instruments used for making payments across borders, not the physical goods and services themselves. While trade in goods and services creates the demand for international liquidity, they are not the liquidity itself.
Option (2) gold and silver: Historically, gold served as a primary international reserve asset under the gold standard. However, the contemporary international monetary system is predominantly based on fiat currencies. While gold still holds value as a reserve asset, hard currencies are the primary form of international liquidity for day-to-day global transactions.
Option (4) exportable surplus: An exportable surplus indicates a country's capacity to produce more goods and services than it consumes domestically, leading to potential trade surpluses. This relates to a country's trade competitiveness and balance of payments position, but it is not the financial instrument or reserve asset that constitutes international liquidity. A country with an exportable surplus still requires hard currencies to settle international transactions.