An economy has only a firm and a worker. The firm pays the worker a salary of Rs 3,000 a month in two equal instalments, on the 1st and the 16th of the month. The worker spends each instalment evenly, before the next one, on the firm’s output. What are the transaction demand for money of this economy and the velocity of circulation of money per month?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 1,500; 4
Given:
Salary = Rs 3,000 a month, paid as two instalments of Rs 1,500
The worker spends each instalment before the next
In a firm-worker economy, the money held by the two together at any moment equals one salary payment. Velocity is the value of transactions ÷ money balance.
After each payday the worker holds Rs 1,500; as she spends it, the money moves to the firm. Together they always hold Rs 1,500, the transaction demand for money.
\( \displaystyle \text{Transactions per month} = 3{,}000 \text{ (salary)} + 3{,}000 \text{ (purchases)} = 6{,}000 \)
\( \displaystyle v = \frac{6{,}000}{1{,}500} = 4 \)
Transaction demand is Rs 1,500 and velocity is 4. Paying twice a month halves the money needed and doubles how often each rupee changes hands.
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 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. …” |