Anita earns Rs 6,000 on the first day of every month and spends it evenly over the month, ending with zero balance. If her transaction demand for money is written as MdT = k.T, where T is her monthly transactions, what are her average cash holding and the value of k?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs 3,000 and k = 0.5
Given:
Balance on day 1 = Rs 6,000
Balance at the end of the month = Rs 0
Monthly transactions, T = Rs 6,000
The average cash holding is the average of the opening and closing balances. It is her transaction demand, MdT = k.T.
Average cash holding = (6,000 + 0) ÷ 2 = Rs 3,000
k = MdT ÷ T = 3,000 ÷ 6,000 = 0.5
The value 2 is the velocity of circulation, v = 1/k. It is not k.
NCERT (2026-27): “The Transaction Motive … Suppose you earn Rs 100 on the first day of every month and run down this balance evenly over the rest of the month. Thus your cash balance at the beginning and end of the month are Rs 100 and 0, respectively. Your average cash holding can then be calculated as (Rs 100 + Rs 0) ÷ 2 = Rs 50, with which you are making transactions worth Rs 100 per month. Hence your average transaction demand for money is equal to half your monthly income, or, in other words, half the value of your monthly transactions. …” “… where, T is the total value of (nominal) transactions in the economy over unit period and k is a positive fraction. … where, v = 1/k is the velocity of circulation. …” |