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    Question

    Liquidity is the ability to accommodate ______ in

    liability and _____ in assets.
    A Decrease; increase Correct Answer Incorrect Answer
    B Increase; decrease Correct Answer Incorrect Answer
    C Increase, increase Correct Answer Incorrect Answer
    D Decrease, decrease Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Liquidity is ability to accommodate decrease in liability & / increase in assets. Liabilities are the sources of funds and hence a decrease in liabilities means reduction in sources or repayment, which is not managed well can lead to liquidity problems. An increase in assets requires  liquidity and hence needs to be managed well.

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