Correct Option
Liquidity refers to the ease and speed with which an asset can be converted into cash without significant loss of value. Based on this definition, the given liquid assets can be arranged in decreasing order of liquidity as follows:
- Currency (4): This is the most liquid asset as it is universally accepted and instantly usable for transactions without any conversion.
- Demand deposits with the banks (1): These include current account deposits, which can be withdrawn or transferred on demand without any prior notice or restrictions.
- Saving deposits with the banks (3): While generally withdrawable, these deposits often have certain restrictions, such as limits on the number of withdrawals per month or a minimum balance requirement, making them slightly less liquid than demand deposits.
- Time deposits with the banks (2): These include fixed deposits, which are held for a specific period. Premature withdrawal typically incurs penalties, thus making them the least liquid among the given options.
Therefore, the correct sequence in decreasing order of liquidity is 4–1–3–2.
Incorrect Options
- Option (a) 1–4–3–2: This sequence incorrectly places demand deposits (1) as more liquid than currency (4). Currency is the most liquid asset.
- Option (b) 4–3–2–1: This sequence incorrectly places time deposits (2) as more liquid than demand deposits (1). Demand deposits are accessible on demand, whereas time deposits have maturity periods and penalties for early withdrawal.
- Option (c) 2–3–1–4: This sequence is incorrect as it places time deposits (2) as the most liquid and currency (4) as the least liquid, which is the reverse of the actual liquidity order.