Given below are two statements:
Statement I: A person who earns Rs 100 on the first day of every month and runs it down evenly over the month has an average cash holding of Rs 50.
Statement II: A person who receives income weekly and pays all bills on the first day of every week still needs to hold a cash balance throughout the week.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Statement I is true but Statement II is false.
Statement I: A person who earns Rs 100 on the first day of every month and runs it down evenly over the month has an average cash holding of Rs 50. — True. The balance starts at Rs 100 and ends at 0. The average is (100 + 0) ÷ 2 = Rs 50.
Statement II: A person who receives income weekly and pays all bills on the first day of every week still needs to hold a cash balance throughout the week. — False. All spending is done on the day the income comes. Nothing is left to spend later, so no cash balance is needed for the rest of the week.
NCERT (2026-27): “The Transaction Motive The principal motive for holding money is to carry out transactions. If you receive your income weekly and pay your bills on the first day of every week, you need not hold any cash balance throughout the rest of the week; you may as well ask your employer to deduct your expenses directly from your weekly salary and deposit the balance in your bank account. But our expenditure patterns do not normally match our receipts. People earn incomes at discrete points in time and spend it continuously throughout the interval. Suppose you earn Rs 100 on the first day of every month and run down this balance evenly over the rest of the month. Thus your cash balance at the beginning and end of the month are Rs 100 and 0, respectively. Your average cash holding can then be calculated as (Rs 100 + Rs 0) ÷ 2 = Rs 50, with which you are making transactions worth Rs 100 per month. …” |