Liquidity and Types of Money?

stocks, currency, savings account





which is most liquid?





i think it would go like so: (from least to most)





currency, savings account, stocks





or do stocks come before currency? i figured currency since money can be currency, and money is the most liquid...but then again stocks and bonds are considered very liquid, right?





i have a quiz tomorrow and this is the only part of the chapter thats confusing me. its a review question at the end of the chapter and there are no answers, its driving me crazy.





oh and if i were to pay a $40 pair of shoes with 2 $20 bills, would the 2 $20 be considered fiat money or commodity money? i think it would be considered fiat money. can someone let me know if i'm correct? my textbook sucks at explaining stuff.





thanks!

Liquidity and Types of Money?
Liquidity is determined by the available spectrum of purchase power of the asset and how quickly it can be accessed to utilize the purchase power.





Thus, if an asset can be used to buy butter, guns, paper AND property, it is more liquid than if it can only buy one or a few of these things. If the asset can be used immediately (like handing someone cash, for example) it is more liquid than something that takes time to either process, or convert to cash.





Looking at these variables, it is then clear that currency is by far the most liquid of these options. Then it gets a little more complicated. If the savings account has a term, meaning that it has to be funded for a period of time without penalty, then it is less liquid than if it didn't have the funding penalty. But even then, it would still be more liquid than a stock. A stock, on the other hand, has to go through several stages in order to be able to access the purchasing power, such as contacting and working with a stock broker, finding someone to buy the stock, and then finalizing the transaction. From there, you have to be able to access the funds from the account in order to use the purchasing power.





Not to confuse you, but a stock can be more quickly accessed if you are buying another stock, but then you are decreasing the spectrum of purchasing power because you are only able to access stocks!! (Not guns, or butter, or whatever else.) So, the stock remains less liquid!





Fiat money is money that the government creates in order to make financial transactions easier. Fiat money, in and of itself, is typically close to worthless. It is because the government SAYS that it is worth something that it becomes something. If you were to pay for your shoes in something that can ITSELF be used (like grain or gasoline) it would be considered commodity money.





If the cash you gave the person was considered commodity money, you would be paying for your shoes with some paper that has some ink and some pretty pictures of dead people. (So you'd probably need a lot more of that paper and ink to be able to afford the equivalent of $40 worth of shoes!!)



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