Near Money (Quasi Money)

Definition of Near Money (Quasi Money)

Near money, or quasi money, are financial assets that are not equivalent to cash but can be quickly converted into cash. These are instruments that are highly liquid, meaning they can be easily sold or turned into cash with minimal loss of value. However, near money is less liquid than actual cash and is not included in the standard definitions of the money supply.

Examples of near money include:

Savings Accounts: Funds in savings accounts are not directly used as a medium of exchange but can be quickly withdrawn for cash.
Treasury Bills: Government securities that can be sold in the secondary market for quick liquidity.
Certificates of Deposit (CDs): Time deposits that can be converted into cash with some delay and possible penalties.

Examples

Example 1: Savings Accounts

A person might have $10,000 in a savings account. This amount is near money because the person can withdraw the cash relatively quickly and without much loss in value, though it may not cover expenses immediately like cash in hand.

Example 2: Treasury Bills (T-Bills)

A corporation might invest in treasury bills to earn some interest rather than keeping the funds idle. These T-bills can be sold before maturity in the secondary market to obtain cash quickly if needed.

Example 3: Certificates of Deposit (CDs)

An individual might hold a certificate of deposit worth $5,000 with a maturity period of six months. Although the funds are not immediately available, the CD can be converted to cash with a penalty if necessary, making it a near money asset.

Frequently Asked Questions (FAQs)

What is the main difference between near money and cash?

Answer: The primary difference is liquidity. Cash is the most liquid asset, readily available to settle any debt immediately. Near money, while quite liquid, requires conversion into cash before it can be used.

Is near money included in the money supply?

Answer: No, near money is not included in the traditional definitions of the money supply (such as M1 or M2). It represents a broader concept of liquidity but does not fall within the narrow confines of the money supply.

Why is near money important for economic stability?

Answer: Near money plays a crucial role in the economy by providing an additional layer of liquidity. It allows entities to quickly mobilize cash for transactions without having to hold large amounts of actual cash, contributing to economic stability.

Can near money be used for immediate payment of debts?

Answer: No, near money cannot be used for immediate expenditures or payment of debts. It needs to be converted into cash first, which can be done relatively quickly and easily for liquid assets.

How does near money differ from financial assets like stocks?

Answer: Near money is generally more liquid and less risky compared to stocks. Stocks can be liquidated, but their value may fluctuate significantly and may incur higher transaction costs and time delays.

Liquidity: The ease with which an asset can be converted into cash.
Money Supply: The total amount of monetary assets available in an economy at a specific time.
Cash: Physical currency such as banknotes and coins used for transactions.
Treasury Bills: Short-term government securities that are highly liquid.
Certificates of Deposit (CDs): Time deposits offered by banks with fixed terms and interest rates.

Online References

Suggested Books for Further Studies

“Principles of Finance” by Scott B. Smart and Lawrence J. Gitman
- A comprehensive introduction to financial principles and practices, including the concept of liquidity and near money.
“Money, Banking and Financial Markets” by Stephen G. Cecchetti and Kermit L. Schoenholtz
- This book provides an in-depth analysis of financial systems, the role of money, and how liquidity affects the economy.
“Financial Markets and Institutions” by Frederic S. Mishkin and Stanley Eakins
- This text explores the structure and function of financial markets and the instruments used, including near money assets.

Accounting Basics: “Near Money” Fundamentals Quiz

### Which of the following is considered near money? - [x] Treasury Bills - [ ] Land - [ ] Stocks - [ ] Gold jewelry > **Explanation:** Treasury Bills are considered near money because they can be converted into cash quickly and with little value loss. Land and gold jewelry are not as liquid, and stocks may incur significant transaction costs and time delays. ### Is near money included in the traditional definitions of the money supply? - [ ] Yes, it is included in the money supply. - [ ] Some types of near money are included. - [x] No, it is not included in the money supply. - [ ] Only in special economic circumstances. > **Explanation:** Near money is not included in the traditional definitions of the money supply, such as M1 or M2. It represents a broader concept of liquidity. ### What is a common characteristic of near money? - [ ] It must be a physical asset. - [x] It can be quickly converted into cash. - [ ] It is used for immediate consumption. - [ ] It is not affected by inflation. > **Explanation:** Near money can be quickly converted into cash, which is its defining characteristic, distinguishing it from more tangible or fixed assets. ### Which of the following best describes an asset's liquidity? - [ ] The stability of its value over time - [ ] Its ability to generate income - [x] How easily it can be converted into cash - [ ] The interest it earns > **Explanation:** Liquidity refers to how easily an asset can be converted into cash, with minimal loss in value or waiting time. ### What differentiates near money from cash? - [x] The need for conversion to be used - [ ] Its ability to settle only some debts - [ ] Its ultimate liquidity - [ ] Its inclusion in the money supply > **Explanation:** Near money needs to be converted into cash before it can be used for transactions, whereas cash is immediately usable. ### Which asset is not considered near money? - [ ] Treasury Bills - [ ] Savings Accounts - [ ] Certificates of Deposit - [x] Common Stocks > **Explanation:** Common stocks are not considered near money due to their price volatility and the time and cost associated with their liquidation. ### Why is near money significant in financial markets? - [ ] It can replace cash for all transactions. - [x] It provides additional liquidity. - [ ] It is more secure than cash. - [ ] It is less affected by economic changes. > **Explanation:** Near money assets provide additional liquidity, allowing economic agents to mobilize cash quickly without holding large amounts of cash reserves. ### Can near money be used directly for purchases? - [ ] Yes, in most cases - [ ] Yes, but only for large transactions - [ ] No, only between financial institutions - [x] No, it first needs to be converted into cash > **Explanation:** Near money cannot be used directly for purchases; it must be converted into cash before being used for transactions. ### How do certificates of deposit (CDs) function as near money? - [x] They can be converted into cash with a penalty - [ ] They are the same as savings accounts - [ ] They can be used immediately - [ ] They are considered cash equivalents > **Explanation:** Certificates of deposit can be converted into cash with a penalty if they need to be liquidated before their maturity date, making them a type of near money. ### Why is cash considered more liquid than near money? - [ ] Because it does not fluctuate in value - [x] Because it is ready for immediate use - [ ] Because it is backed by the government - [ ] Because it earns interest > **Explanation:** Cash is considered more liquid than near money because it is ready for immediate use in transactions without any need for conversion.

Thank you for exploring the concept of near money with us. Keep enhancing your financial knowledge to better understand the mechanisms of money and liquidity!