The most commonly used measure of the money supply (M1) consists of a term (curr

Question

The most commonly used measure of the money supply (M1) consists of a term (currency) that is directly controlled by policy and another term that is influenced by both policy and economic activity (Debit Cards). Given this and a general rule that the Fed wants to increase the amount of currency during a downturn, what should the two offsetting effects be in terms of the relationship between GDP and money supply? If instead of money, we want to look at the supply of all liquid assets, how should the above tradeoff change? A good answer defines what it means for an asset to be liquid and why the liquidity of entire classes of assets may change during downturns. Why might some assets be more liquid during different parts of the business cycle? (I would appreciate it if the answer isn't too long)

Explanation / Answer

LIQUID ASSETS:
An asset that can be converted into cash in a short time, with little or no loss in value. Liquid assets include items such as accounts receivable, demand and time deposits, gilt edged securities. In some countries, precious metals (usually gold and silver) are also considered liquid assets.liquid assets are those that can be used to pay off debts in a hurry.

In the event of a decrease in revenue or an economic downturn, a company that is highly illiquid would have to deal with selling off, or liquidating, fixed assets to meet its financial obligations. This could mean selling property or equipment that is essential to the day-to-day operations of the business, limiting its ability to generate revenue down the road.
Factors unique to different companies and industries will also impact a company’s quick ratio, such as the timing of capital expenditures and other asset purchases, allowances for bad debt and other financial policies. liquid assets like cash are the most liquid at all times of the business cycle. other liquid assets may take time to get liquidated depending upon the demand and their use.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.