In a two-person economy, a money balance worth only Rs 100 is used for making transactions worth Rs 200 a month. Why is this possible?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Each rupee changes hands twice a month.
The worker pays the firm, and the firm pays the worker. So each rupee is used twice in the month, and Rs 100 does Rs 200 of work. The number of times money changes hands is the velocity of circulation.
NCERT (2026-27): “The Transaction Motive … The two-person economy described above can be looked at from another angle. You may perhaps find it surprising that the economy uses money balance worth only Rs 100 for making transactions worth Rs 200 per month. The answer to this riddle is simple - each rupee is changing hands twice a month. On the first day, it is being transferred from the employer’s pocket to that of the worker and sometime during the month, it is passing from the worker’s hand to the employer’s. The number of times a unit of money changes hands during the unit period is called the velocity of circulation of money. …” |