The Guidotti-Greenspan rule suggests that foreign exchange reserves a sufficient when they
A) Cover 3 months of imports
B) are equal to 20% of GDP
C) are equal to the value of foreign currency debt
D) are equal to 20% of M2
E) are equal to short term debt of one year maturity or less

Question

Quizplus · Accepted Answer

The Guidotti-Greenspan rule suggests that foreign exchange reserves should be equal to short term debt of one year maturity or less. This is because such debt is most vulnerable to changes in market conditions and can quickly become unpayable if there is a sudden loss of investor confidence or other economic shocks. Therefore, having enough reserves to cover this debt can help mitigate against such risks and maintain stability in the economy.

The Guidotti-Greenspan Rule Suggests That Foreign Exchange Reserves a Sufficient