What is the primary function of liquidity in an economy?

The primary function of liquidity in an economy is to facilitate the ease of transactions. Liquidity refers to how quickly and easily assets can be converted into cash or a cash-equivalent without significant loss in value. In a liquid market, it's easier for participants to buy and sell assets, allowing for smooth transactions and more efficient allocation of resources.

High liquidity in an economy enhances consumer confidence and encourages spending since individuals and businesses can quickly access funds when needed. This ease of transactions promotes economic stability and growth, as it supports both everyday operations and larger economic activities.

The other options focus on different aspects of economic analysis or policy but do not directly relate to the concept of liquidity. Wealth distribution looks at inequality, government budget deficits involve fiscal policy decisions, and inflation regulation pertains to monetary policy — none of which pertain to facilitation of transactions in the same way that liquidity does. This central role in transactions solidifies liquidity as a foundational element for a well-functioning economy.