In an economy, the value of transactions in a year is Rs 1,500 crore and the transaction demand for money is Rs 250 crore. If the velocity of circulation of money rises to 8 while the value of transactions stays the same, the transaction demand for money becomes:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 187.5 crore
Given:
Value of transactions, T = Rs 1,500 crore (unchanged)
New velocity of circulation, v = 8
The relation is v × MdT = T, so MdT = T ÷ v.
New transaction demand = 1,500 ÷ 8 = Rs 187.5 crore
Money changes hands more often, so less money is needed for the same transactions.
NCERT (2026-27): “The Transaction Motive … 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. Thus, in general, we may rewrite equation (3.1) in the following form |