Saturday, April 18, 2009

key services provided by the financial system (3)

the second service the financial system offers savers and borrowers is liquidity , which refers to the ease with which an asset can be exchanged for other assets or for goods and services. savers care about liquidity of of financial assets. When they need their assets for their own consumption or investment, they want to be able to exchange them easily. In general , the more liquid an asset, the easier it is to exchange the asset for something else. For example , if you have a dollar bill in your pocket , you can easily exchange it for a hamburger . Thus , a dollar bill is highly liquid . you could also cash a check within a short period of time to buy clothes . Selling your car , however, takes more time because personal property is not very liquid. By holding financial claims (such as stock or bonds ) on a factory , individual investor have more liquid savings than they would if they owned the machines in the factory. the reason is that the investor can more easily sell the claim than a specialized machine in order to buy other assets or goods . Liquidity means that an individual or firm can respond quickly to new opportunities or unexpected events financial assets , such as stocks , bonds, or checking accounts , are more liquid than cars , machinery , or real estate.

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