A rise in three of the following raises the transaction demand for money (MdT = kPY). Which one is the odd one out?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Market rate of interest (r)
Transaction demand depends on the value of transactions. It rises with real GDP, the price level and the total value of transactions. The rate of interest does not enter MdT = kPY. It acts on the speculative demand, and inversely.
NCERT (2026-27): “The Transaction Motive … where Y is the real GDP and P is the general price level or the GDP deflator. The above equation tells us that transaction demand for money is positively related to the real income of an economy and also to its average price level.” “The Speculative Motive … Total demand for money in an economy is, therefore, composed of transaction demand and speculative demand. The former is directly proportional to real GDP and price level, whereas the latter is inversely related to the market rate of interest. …” |