Consider the following liquid assets:
- Demand deposits with the banks
- Time deposits with the banks
- Savings deposits with the banks
- Currency
The correct sequence of these assets in the decreasing order of liquidity is
Smart Elimination
Understand what is “Liquidity” first.
Liquidity is how easily an asset can be converted into cash / medium of exchange without losing value.
Most liquid → cash in hand
Least liquid → funds that are locked in for a period.
Potential Trap
Confusing Time Deposits with Demand Deposits.
Answer Key & Explanation
Answer: DThe correct answer is Option D.
Explanation: Liquidity refers to how quickly an asset can be converted into cash without loss of value.
- Currency (4): Cash in hand. 100% liquid. (Highest)
- Demand deposits (1): Current/Savings accounts. Can be withdrawn anytime via ATM/Cheque. Very liquid.
- Savings deposits (3): (Note: Usually Savings is a demand deposit, but strictly speaking, some restrictions exist compared to current accounts. However, contextually, Time deposits are clearly less liquid).
- Time deposits (2): Fixed Deposits. Locked for a period. Penalty for premature withdrawal. (Lowest)
Order: Currency > Demand Deposits > Savings > Time Deposits. Sequence: 4-1-3-2.
(Note: In standard M1/M3 definitions, Demand Deposits include Savings Account portion. But given the options, Currency is #1 and Time Deposits is last).
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Foundational question based on core concepts.