Chapter 23, Problem 1FRQ

a.

To determine

The meaning of the liquid asset.

Explanation of Solution

Assets that can be converted into cash or cash equivalents in a very short span of time are referred to as liquid assets. The liquid asset includes cash, checkable deposits, traveler’s check, etc. cash is the most liquid asset among other money market instruments.

Economics Concept Introduction

Money: Money is the medium of exchange through which goods and services can be traded. It can perform three main functions i.e. medium of exchange, store of value, and unit of account.

b.

To determine

The most liquid asset among, Federal Reserve note, saving a deposit, and a house.

Explanation of Solution

The most liquid asset is cash or cash equivalent. In this question, the Federal Reserve note can be used for any transaction without converting it into another form.

Economics Concept Introduction

Money: Money is the medium of exchange through which goods and services can be traded. It can perform three main functions i.e. medium of exchange, store of value, and unit of account.

c.

To determine

The least liquid asset in part b.

Explanation of Solution

A house is a fixed asset that takes time to be converted into cash.

Economics Concept Introduction

Money: Money is the medium of exchange through which goods and services can be traded. It can perform three main functions i.e. medium of exchange, store of value, and unit of account.

d.

To determine

The monetary aggregates in which checkable deposits are included.

Explanation of Solution

Checkable deposits, traveler’s checks, cash, etc. are included in the measure of M1 whereas M2 includes money market instruments that can be converted into cash easily. These can be referred to as near-money.

Economics Concept Introduction

Monetary aggregates: Monetary aggregate refers to the overall measure of the money supply. It includes M1 and M2 measures of the money supply.