Answer to Question 1:

It is sometimes argued that Canada Savings Bonds should be regarded as part of the country's money stock because one can cash them in at any bank. Since one can also sell holdings of common stocks through a commercial bank, these equity shares are as liquid as Canada Savings Bonds and equally qualify for inclusion as part of the stock of money.

True or False?

False! Common stocks are less liquid than Canada Savings Bonds for two reasons. First, one cannot obtain cash for them that same day---the bank has to order its broker to sell them for you and it will take a couple of days before the funds reach your chequing account. Second, you know that you will obtain $1000 for a $1000 Canada Savings Bond. You can not be sure how much you will obtain for shares of a particular company. It will depend on market conditions for shares in that company on the day the broker sells them for you.

Assets like common stocks, even though they can be sold rather easily, are a poor way to hold funds that you may later want to use as money. When you invest in, say, IBM stock, you are typically thinking in terms of a return that will be realized over a number of years. You know that the market price of the stock will fluctuate and that you might experience a loss on paper in the short-run. This is of little concern as long as there is the prospect that the stock will pay good dividends and have a sufficiently high price in the long-run.

On the other hand, if you know that the IBM stock will have to be cashed in at some point in the near future to obtain cash necessary to purchase an automobile or other commodity, you will invest instead in a savings account or some other credit instrument that yields defined interest and has a cash value that is known with certainty. This is why a savings account is more liquid than common stock holdings.

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