Q.14 It is not unusual to find a busi... [FREE SOLUTION]

Chapter 3: Q.14 (page 111)

It is not unusual to find a business that displays a sign saying 鈥渘o personal checks, please.鈥� On the basis of this observation, comment on the relative degree of liquidity of a checking account versus currency

Short Answer

Expert verified

Different monetary aggregates such as checks and cash have different liquidity.

Step by step solution

Step 1. Introduction

Currency is a kind of payment that can be used to buy and sell products and services. In a nutshell, it's money, usually in the form of paper or coins, issued by a government and widely accepted as a means of payment at face value.

Step 2. Explanation

The amount of time and effort (i.e. transaction costs) required to convert an asset into currency is used to determine the degree of liquidity of that asset. Liquidity varies depending on the sort of money used. A check, which reflects a checking account balance, is a very liquid kind of money. After all, to pay for a good or service with a check, you just need two things: the date and the amount to sign the check. However, as the above example illustrates, some merchants refuse to take checks as payment. The merchant cannot refuse to accept dollar as it is a legal tender. Thus accepting check may include transaction cost.

But with a check you need to go to bank to deposit it, which is not the case with currency. So, it is generally preferred over check.