Q:

What distinguishes money from other assets in the economy?

A:

Quick Answer

Money differs from other assets in that it is the most liquid asset. Liquidity refers to the availability of a specific resource for investment and spending.

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Full Answer

There are numerous assets in the financial industry, including cash, checking account funds, savings account funds, certificates of deposit, mutual funds, stocks and bonds. These assets can all be listed in a hierarchy in terms of their liquidity. For instance, it is easy to go to the store and use cash to purchase goods. On the other hand, a person cannot go to the store to purchase goods with a stock or bond. Therefore, cash is more liquid than a stock or bond.

In the financial sector, assets are used to measure an entity's solvency, or its ability to pay off its debt. Without sufficient money, or capital, a company may not be able to pay its financial obligations. A company can own multiple assets, but money is the most liquid, meaning it can be used at any time to fulfill financial obligations. Businesses that do not have liquid assets may own illiquid assets, such as real estate. Given the fluctuations in real estate values and the time it takes to convert it to cash, real estate is considered much less liquid than money.

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