EconomicsMacro Economics: Money and Banking

In an economy, the transaction demand for money is MdT = kPY, with k…

In an economy, the transaction demand for money is M^d_T = kPY, with k = 0.2. The price level (P) rises from 1.5 to 2, and at the same time real GDP (Y) falls from Rs 2,000 crore to Rs 1,800 crore. The transaction demand for money:

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → rises from Rs 600 crore to Rs 720 crore

Given:

k = 0.2

P rises from 1.5 to 2

Y falls from Rs 2,000 crore to Rs 1,800 crore

Transaction demand for money is M^d_T = kPY. Both P and Y change, so both go into the working.

Before: 0.2 × 1.5 × 2,000 = Rs 600 crore

After: 0.2 × 2 × 1,800 = Rs 720 crore

Option (2) falls from Rs 600 crore to Rs 540 crore — uses only the fall in Y.

Option (3) rises from Rs 600 crore to Rs 800 crore — uses only the rise in P.

NCERT (2026-27): “The Transaction Motive … Thus, in general, equation (3.1) can be modified in the following way
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.”