Money, Banking, and Economic Activity by Gail E. Makinen

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By Gail E. Makinen

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The reason is that since the federal government has the power to levy and collect taxes, it need never default on its obligations. Hence, these loans are virtually free of the default risk. Second, shortmaturity obligations have a high degree of liquidity. They are highly marketable and their market price does not fluctuate greatly even for sizable movements in market interest rates. On the other hand, though assets representing personal loans acquired by the ultimate lender may have a low default risk, they are probably highly illiquid and therefore are made at market rates of interest in excess of those paid by the government.

1977). Rich­ Review, Summary 51 Fand, David. " Banking and Monetary Studies, edited by Deane Carson. : Richard D. Irwin, 1963. Goldsmith, Raymond W. Financial Institutions. New York: Random House, 1968. , and Shaw, Edward S. " American Economic Review, Vol. 45, No. 4 (Sept. 1955). Higgins, Bryon. " Monthly Review, Federal Reserve Bank of Kansas City (July-Aug. 1977). , and Blyn, Martin R. A History of Financial Intermediaries. New York: Random House, 1971. , et al. Financial Institutions and Markets.

In general, the deposit claims against financial intermediaries given to ultimate lenders in return for their surplus funds are highly liquid. In the case of checking deposit claims on financial institutions, they are money itself. , title cannot be transferred by giving the deposit to someone else), can either by custom or law be converted into the means of payment on demand. That is, the deposit can be withdrawn in currency or a draft (check) drawn against a financial institution. Certain classes of time deposits have fixed maturities and can only be converted into the means of payment when they fall due.

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