Civil Services Prep

Prelims 2013 · Economy · Question 24

Consider the following liquid assets:<br/>1. Demand deposits with the banks<br/>2. Time deposits with the banks<br/>3. Savings deposits with the banks<br/>4. Currency<br/><br/>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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