In an economy, the total value of transactions in a month is Rs 400 and the transaction demand for money is Rs 100. In the relation MdT = k.T, what are the values of k and the velocity of circulation of money (v)?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → k = 0.25 and v = 4
Given:
Total value of transactions, T = Rs 400
Transaction demand for money, MdT = Rs 100
From MdT = k.T, k is money demand divided by the value of transactions, and the velocity of circulation is v = 1/k.
\( \displaystyle k = \frac{100}{400} = 0.25 \)
\( \displaystyle v = \frac{1}{k} = \frac{1}{0.25} = 4 \)
So k = 0.25 and v = 4: each rupee changes hands four times in the month.
NCERT (2026-27): “The Transaction Motive … The transaction demand for money of the economy is again a fraction of the total volume of transactions in the economy over the unit period of time. In general, therefore, the transaction demand for money in an economy, MdT, can be written in the following form
“where, v = 1/k is the velocity of circulation. …” |
