Liquidity

Liquidity, in economics, measure of the ease with which assets can be converted into money (the standard of an entirely liquid medium of exchange). A bank account with easy withdrawal terms has greater liquidity than property such as buildings. An individual or company whose assets are in cash, or easily disposable securities or negotiable instruments, is described as liquid. International liquidity is the aggregate amount of gold, hard currency, and international media of exchange such as Special Drawing Rights and European Currency Units available worldwide to finance trade. The liquidity ratio of a company is the ratio of its liquid assets to its liabilities; for a bank, the ratio is the proportion of total assets held in cash, which is sometimes subject to government regulation. Liquidity preference, first described by John Maynard Keynes, is a preference to hold cash rather than stocks, bonds, or other assets, and is usually explained by low prevailing rates of interest. Keynes used the concept to explain the Great Depression, arguing that with very low interest rates, an increased money supply will not encourage investment and drive interest rates further down, but will be held back in anticipation of an interest rate rise. In such cases, individual liquidity will be high, but economic activity will be low.