In an economy, nominal GDP is Rs 600 crore and real GDP is Rs 500 crore. The transaction demand for money is MdT = k.P.Y, where P is the GDP deflator and k = 0.25. What is the transaction demand for money?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 150 crore
Given:
Nominal GDP = Rs 600 crore
Real GDP, Y = Rs 500 crore
k = 0.25
First find the GDP deflator P, the ratio of nominal to real GDP. Then use \( Md_T = k \times P \times Y \).
\( \displaystyle P = \frac{600}{500} = 1.2 \)
\( Md_T = 0.25 \times 1.2 \times 500 \)
\( Md_T = \) Rs 150 crore
P × Y is the nominal GDP, so the same answer comes from 0.25 × 600. Multiplying k by real GDP alone (Rs 125 crore) leaves out the price level.
This question uses Money and Banking and National Income Accounting together.
NCERT (2026-27): “The Transaction Motive … Md T = kPY (3.3) 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.” National Income Accounting: “2.4 Nominal and Real GDP … Notice that the ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the real GDP) to the current year. In the calculation of real and nominal GDP of the current year, the volume of production is fixed. Therefore, if these measures differ it is only due to change in the price level between the base year and the current year. The ratio of nominal to real GDP is a well known index of prices. This is called GDP Deflator. …” |