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Money
Theory 2 - Liquidity - what makes your money run?
The most liquid asset is cash. Liquidity therefore, refers to the ease with which assets can be turned into cash. Money can be kept in all sorts of different forms. Cash is universally accepted as a means of spending and so is the most liquid form of money. However, you may also have chosen to keep your money in a building society account, but you may have to give, say, three months notice to withdraw it. You still have money, but it is much less liquid than cash. We can show the liquidity of money as a spectrum - a range of different types.
This spectrum is shown from the perspective of an individual. The same asset may have a different liquidity to different people. For example, for an individual to turn a gilt-edged security into cash to spend may take some time. (A gilt edged security is a loan to the government through the purchase of a bond. The government agree to pay you back in x years time and in the meantime will pay you interest for lending the money. For example 4¼% 2010 Treasury Stock would indicate that the Treasury are borrowing money at a rate of 4¼% per annum and will pay you the capital sum back at some date in 2010!) On the other hand, for a commercial bank to do the same may take minutes, as they have access to the money markets (or Bank of England) to sell those gilts.
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