A firm holds currency in its cash register, demand deposits in its commercial checking account, and 91-day Treasury bills in its investment portfolio. Which of these assets is categorized as near money, and what justification explains this classification?
- Treasury bills, because they function as a store of value and can easily be converted into cash, but cannot be used directly as a medium of exchange.Answer
- BDemand deposits, because they require bank branch authorization before they can be transferred between transacting parties.
- CCurrency in cash register, because its face value is legal tender whereas its token value as paper is negligible.
- DDemand deposits, because their supply is strictly regulated by central bank reserve requirement ratios.
Answer
Treasury bills are classified as near money because they perform the store of value function and can be liquidated quickly into money, but they are not directly spendable for daily transactions.
Near money (or quasi-money) refers to financial assets that are highly liquid and easily convertible into cash without significant loss of value, but are not directly acceptable as a medium of exchange. Treasury bills fit this description precisely.
Step-by-Step Solution
Key Concept
Classification of Money and Near Money Assets
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