Liquidity Generally

Liquidity Generally

Liquidity. (a) Generally, the ease with which an asset can be turned into money. Assets range from Cash, which is perfectly liquid, through short-term claims and longer-term securities to durable consumption and producer goods (and works of art). Each has a measure of liquidity in descending order. Liquidity can also refer to the degree of immediate command over resources. If wealth is wholly invested in illiquid assets, such as property, it gives little immediate command Over resources. To part with cash for, say, a Government security, is to part with liquidity and to substitute deferred for immediate command over resources. Thus the degree of convertibility from deferred to immediate command measures the liquidity of an asset.

(b) In discussion of monetary affairs, the total supply of money and 'near-money' assets. -

(c) In international trade, the total supply of currency and assets internationally acceptable as liquid.

(d) In accounting, the difference between current assets and current liabilities, i.e., between assets that are, or are readily made, liquid cash, stock, debtors and liabilities currently due.

Liquidity Preference, a means of expressing the demand for money. The total of individual liquidity preferences produces the community's liquidity preference, which determines the total demand for money.

The demand for money is related to the two main functions of money: a means of exchange, and (2) a store of value. From these functions Keynes derived three motives for holding money: (1)the transactions motive, (2) the precautionary motive, (3) the speculative motive.

The transactions motive governs the demand for money to finance current transactions by consumers and business men. The -amount of money required will depend upon the total value of the transactions. If economic activity, and thus the national income, are high, the total value of transactions will be higher than at low levels of economic activity. The demand for money for transactions will depend mainly on the level of the national income.

The precautionary motive governs how much money will be held to provide for future requirements, unforeseen contingencies and occasional advantageous purchases. This demand also will depend mainly on the level of national income.

Moneyrequired for the speculative motive is held if individuals prefer cash to interest-bearing securities. The amount of money so held depends upon the prevailing level of interest rates (as indicated by, for example, the fixed yield on riskiess bonds expressed as a percentage of bond prices), and what individuals think the future rate of interest (and, therefore, the price of bonds) is likely to be. The higher the rate of interest and the stronger the expectation that the rate will fall (and bond prices rise), the weaker will be the desire to hold money and the stronger the desire to hold income-earning assets rather than money; and conversely.

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