The ability of a financial asset to be used to immediately make transactions is called:
A) store of value.
B) medium of exchange.
C) illiquidity.
D) liquidity.
The correct answer and explanation is :
The correct answer is D) liquidity.
Explanation:
Liquidity refers to the ability of an asset to be quickly converted into cash or used in transactions without significantly affecting its price. In the context of financial assets, liquidity indicates how easily an asset can be bought or sold in the market at a stable price. Cash is considered the most liquid asset because it can immediately be used to make transactions without any delay or value loss. Other assets, such as real estate or long-term investments, are less liquid because they take more time to sell and may be subject to fluctuations in value during the selling process.
The term “liquidity” is central to financial markets, as it affects the ease with which market participants can enter or exit positions. Assets that are highly liquid, like stocks of major companies, can be sold or purchased quickly and at a predictable price. On the other hand, assets such as rare collectibles or real estate are less liquid, meaning they cannot be quickly converted to cash or used for immediate transactions.
Here’s a breakdown of the other options:
- A) Store of value: This refers to an asset’s ability to maintain its value over time, which allows it to be used in the future. Gold, for example, is often considered a store of value, but it does not necessarily offer immediate use for transactions, unlike cash.
- B) Medium of exchange: This refers to an asset’s ability to be used as an intermediary in trade. For an asset to be a medium of exchange, it must be accepted in transactions. Cash is the most common medium of exchange.
- C) Illiquidity: This is the opposite of liquidity. It refers to assets that cannot be easily sold or traded for cash without a significant loss in value or time.
Thus, the ability of a financial asset to be used immediately in transactions points to liquidity.