Given below are two statements:
Assertion (A): An increase in nominal GDP raises the transaction demand for money.
Reason (R): The total value of annual transactions in an economy includes transactions in intermediate goods and services, and so is much greater than the nominal GDP.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): An increase in nominal GDP raises the transaction demand for money. — True. More nominal GDP means more transactions to pay for.
Reason (R): The total value of annual transactions in an economy includes transactions in intermediate goods and services, and so is much greater than the nominal GDP. — True. Transactions count intermediate goods too, which GDP leaves out.
Why R does not explain A?
R only compares the size of transactions and GDP. Being larger does not show that the two move together.
The real reason for A: there is a stable, positive relation between the value of transactions and nominal GDP. So a rise in nominal GDP raises transactions, and with them the transaction demand for money.
NCERT (2026-27): “… We are ultimately interested in learning the relationship between the aggregate transaction demand for money of an economy and the (nominal) GDP in a given year. The total value of annual transactions in an economy includes transactions in all intermediate goods and services and is clearly much greater than the nominal GDP. However, normally, there exists a stable, positive relationship between value of transactions and the nominal GDP. An increase in nominal GDP implies an increase in the total value of transactions and hence a greater transaction demand for money from equation (3.1). …” |