What does liquidity refer to in financial terms?

Liquidity in financial terms refers to the ease with which an asset can be converted into cash or cash equivalents without significantly affecting its price. This concept is essential in understanding how quickly and efficiently assets can be transformed into currency to meet immediate financial obligations.

Option B accurately highlights that liquidity pertains specifically to the conversion of non-monetary assets into money. Examples of highly liquid assets include cash itself, money market instruments, or stocks of large companies that can be readily sold in the market. In contrast, assets like real estate or collectibles are less liquid because they can take longer to sell and might require price concessions to sell quickly.

This focus on the ease and speed of conversion distinguishes liquidity from other financial concepts, such as the total cash available in an economy or interest rates on loans, neither of which directly addresses how quickly an asset can be turned into cash.