Question

Why does the United States not need to hold large amounts of foreign exchange reserves relative to its size? Explain.

Answer 1

Meaning of foreign exchange reserves-

These are the reserves or the assests which are held by the central bank in foreign currencies and used to influence monetary policy and to maintain confidence in financial markets .they are maintained to pay external debts or back liabilities.

US does not need to hold large amount of foreign exchange reserves .tge follwing are the resons discussed below-

1- US dollars is internally accepted currency,so they need not to kept it for reserves.

2- its a common reserve for all the nations ,its a benchmark currency for international trade or transactions are dominated.

3- US govt. used a market system ,so they don't have much govt.economic assets,therefore they do not need to maintain high foreign exchange to safe guard assets.

4 - US has unlimited stock pile of US dollars since its a common reserves for all nations.