A firm pays its worker a salary of Rs 100 at the beginning of every month, and the worker spends it evenly over the month on the firm’s output. Consider the following statements about this two-person economy:
(A) The total transaction demand for money in the economy is Rs 100.
(B) The total volume of monthly transactions in the economy is Rs 200.
(C) The average money holding of the firm as well as of the worker is Rs 50.
(D) The velocity of circulation of money in the economy is 0.5 a month.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A), (B) and (C) only
Each holds Rs 100 at one end of the month and Rs 0 at the other, so each holds Rs 50 on average.
(A) The total transaction demand for money in the economy is Rs 100. — Correct. Rs 50 + Rs 50 = Rs 100.
(B) The total volume of monthly transactions in the economy is Rs 200. — Correct. The firm sells output worth Rs 100 and the worker sells services worth Rs 100: Rs 200.
(C) The average money holding of the firm as well as of the worker is Rs 50. — Correct. (Rs 100 + Rs 0) ÷ 2 = Rs 50 each.
(D) The velocity of circulation of money in the economy is 0.5 a month. — Incorrect. Rs 100 of money does Rs 200 of transactions, so each rupee changes hands twice. v = 2, not 0.5.
NCERT (2026-27): “The Transaction Motive … Consider, next, a two-person economy consisting of two entities - a firm (owned by one person) and a worker. The firm pays the worker a salary of Rs 100 at the beginning of every month. The worker, in turn, spends this income over the month on the output produced by the firm - the only good available in this economy! Thus, at the beginning of each month the worker has a money balance of Rs 100 and the firm a balance of Rs 0. On the last day of the month the picture is reversed - the firm has gathered a balance of Rs 100 through its sales to the worker. The average money holding of the firm as well as the worker is equal to Rs 50 each. Thus the total transaction demand for money in this economy is equal to Rs 100. The total volume of monthly transactions in this economy is Rs 200 - the firm has sold its output worth Rs 100 to the worker and the latter has sold her services worth Rs 100 to the firm. …” “… The answer to this riddle is simple - each rupee is changing hands twice a month. … The number of times a unit of money changes hands during the unit period is called the velocity of circulation of money. In the above example, it is 2, inverse of half - the ratio of money balance and the value of transactions. …” |