Final answer:
True, higher returns on savings typically lead to lower liquidity as assets that provide higher returns, such as stocks or bonds, are not as readily convertible to cash compared to a bank account; yet they require more effort to liquidate. Policy changes can impact savings behavior based on the elasticity of the supply curve for financial capital. Tangible assets also have low liquidity.
Step-by-step explanation:
The statement that higher returns on savings will usually result in less liquidity is true. The concept of liquidity pertains to how quickly and easily an asset can be converted into cash without significant loss of value. When you have money in a savings account, it is typically not as liquid because it requires additional steps, like going to the bank or an ATM machine, to access the funds. Conversely, investments that offer higher returns, like certain bonds or stocks, are often less liquid, as it takes time and effort to sell them and access your money. Firms can also experience variations in their needed savings rates based on returns promised to their workers for retirement benefits. When higher returns are expected, these firms can allocate less money into pension funds yet still meet future obligations, effectively reducing their liquid assets. In terms of policy, measures aiming to increase the quantity of savings through tax breaks can affect the market differently depending on the elasticity of the supply curve for financial capital. A highly elastic supply curve means that a small increase in interest rates will lead to a larger increase in savings rates, while a highly inelastic curve means the increase in savings will be marginal. For tangible assets like housing, art, or collectibles, liquidity is characteristically low because these assets often take time to sell and transform into cash.