Final answer:
Primary and secondary reserves are liquid assets held by banks. Primary reserves are cash or equivalents required by the reserve requirement, while secondary reserves are assets easily convertible to cash, used for additional security and to meet obligations.
Step-by-step explanation:
In banking, primary reserves and secondary reserves are considered to be liquid assets. Primary reserves are the cash that banks have on hand, including the cash in their vaults or money held at the Federal Reserve Bank, which is required by the reserve requirement. These are highly liquid and easily converted into cash since they are already in cash or cash equivalents form. Secondary reserves, while also liquid, refer to assets that are readily convertible to cash but may not be in cash form. These could include short-term government securities or other easily marketable securities. Banks hold these for not only meeting the reserve requirements set by the Federal Reserve but also as a financial cushion to promptly address any unexpected withdrawals or payments. Thus, liquidity refers to the ease with which assets can be converted into cash to be used for transactions or to meet obligations without a significant loss in value.