According to the precautionary motive,businesses hold liquid assets because:
A)cash inflows and outflows are not perfectly matched in both timing and amount.
B)there is always the possibility that extra cash will be needed to meet unexpected costs.
C)the opportunity to make profitable investments is anticipated.
D)there is a possibility of bankruptcy.

Question

Quizplus · Accepted Answer

The precautionary motive suggests that businesses hold liquid assets as a precautionary measure against unforeseen events or unexpected costs. Therefore, option B, which states that there is always the possibility that extra cash will be needed to meet unexpected costs, is the correct answer. Option A is not incorrect; however, it does not capture the essence of the precautionary motive. Option C refers to the speculative motive, and option D refers to the transaction motive.

According to the Precautionary Motive,businesses Hold Liquid Assets Because