[Mission 2024] STATIC QUIZ, 17 October 2023 – Economy

Solution: b)

Options 2 and 4 are correct.

The conference was held from July 1 to 22, 1944. Agreements were signed that, after legislative ratification by member governments, established the International Bank for Reconstruction and Development (IBRD, later part of the World Bank group) and the International Monetary Fund (IMF). This led to what was called the Bretton Woods system for international commercial and financial relations.

Solution: b)

Statement 3 is incorrect.

The IMF is a quota-based institution. Quotas are the building blocks of the IMF’s financial and governance structure. An individual member country’s quota broadly reflects its relative position in the world economy. Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account.

The IMF’s Board of Governors conducts general quota reviews at regular intervals (no more than five years). Any changes in quotas must be approved by an 85 percent majority of the total voting power, and a member’s own quota cannot be changed without its consent.

Solution: b)

Statement 2 is incorrect.

The EFF was established to provide assistance to countries experiencing serious payment imbalances because of structural impediments or slow growth and an inherently weak balance-of-payments position. An EFF provides support for comprehensive programs including the policies needed to correct structural imbalances over an extended period.

Extended arrangements are typically approved for periods of three years, but may be approved for periods as long as 4 years to implement deep and sustained structural reforms. Amounts drawn under an EFF are to be repaid over 4½–10 years in 12 equal semiannual installments.

As with other IMF lending, the size of borrowing under an EFF is guided by a country’s financing needs, capacity to repay, and track record with past use of IMF resources.

Solution: a)

Only Statement 1 is correct.

The Special Drawing Right (SDR) is an interest-bearing international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries.

The SDR is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro, pound sterling and Chinese Renminbi. It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members. The value of the SDR is not directly determined by supply and demand in the market, but is set daily by the IMF on the basis of market exchange rates between the currencies included in the SDR basket.

It can be held and used by member countries, the IMF, and certain designated official entities called “prescribed holders”—but it cannot be held, for example, by private entities or individuals. Its status as a reserve asset derives from the commitments of members to hold, accept, and honor obligations denominated in SDR.

Solution: b)

Statement 3 is incorrect.

The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies. It cannot be used to fund infrastructure projects as it is not a currency. Same goes for settling domestic financial bills of the government.

SDR allocations can play a role in providing liquidity and supplementing member countries’ official reserves.

IMF member countries can borrow SDRs from its reserves at favourable interest rates, mostly to adjust their balance of payments to favourable positions.