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Reserve Assets for Financing and Regulating Payment Imbalances

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RESERVE ASSETS

Reserve assets are instruments available with government authorities for financing or regulating payment imbalances, it comprises of monetary gold, special drawing rights (SDRs) and foreign exchange. Central bank and treasuries use this instrument in financing the deficit. The reserves are also the balancing figure of the balance of payment account. If sufficient reserves are not available, a country needs to borrow money from institutions like the World Bank and International Monetary Fund (IMF).

AUTONOMOUS AND ACCOMMODATING TRANSACTION

Most of the items of the Current account are items of normal course, i.e, they are not deliberately planned by the government, such as goods and services imported or exported, donations
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Due to all these the imports in a country are high and exports are less which causes a deficit in the balance of payment account and thus needs to be balanced with a surplus in its Capital account. There are various types of disequilibrium such as cyclical disequilibrium, structural disequilibrium, short term disequilibrium and long term or fundamental disequilibrium.

The disequilibrium in the balance of payment account can be corrected using two types of policies; monetary policies and non-monetary policies. These policies are created by the government of respective countries, after analysing the current account, so as to attract investments from foreign nations to correct their current accounts disequilibrium.

METHODS OF CORRECTING DISEQUILIBRIUM

DEFLATION
In economic terms, deflation is defined as a persistent fall in the general level of prices (Groth et al, 2009). In this policy, government authorities perform Open Market Operations where government buys and sells securities for controlling the money supply. It is a direct method of controlling credit, in order to reduce the flow of money. Due to this
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