Civil Services Prep

Prelims 2013 · Economy · Question 24

Consider the following liquid assets:

  1. Demand deposits with the banks
  2. Time deposits with the banks
  3. Savings deposits with the banks
  4. Currency

The correct sequence of these assets in the decreasing order of liquidity is

  1. 1-4-3-2
  2. 4-3-2-1
  3. 2-3-1-4
  4. 4-1-3-2

Answer

4-1-3-2

Liquidity order: asset that can be used for payment immediately is more liquid.

  1. Currency – Most liquid because it is legal tender and can be used directly for transactions. So, it must come first.
  2. Demand deposits – Withdrawable on demand, usually by cheque/transfer, so highly liquid but slightly less than currency. Comes after currency.
  3. Savings deposits – They are a form of demand deposit, but withdrawals are relatively less free than current/demand deposits used for transactions. Less liquid than demand deposits.
  4. Time deposits – Locked in for a fixed period; premature withdrawal may face restrictions/penalty. Least liquid.

Therefore, the decreasing order of liquidity is 4-1-3-2.

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