Question

a)	(You are given a monthly income of RM1,000. Assume a constant consumption rate during the month. Compute: (i) the transaction demand for money, and (ii) transaction velocity of money)
(b)	(Supposing that a new company policy introduces twice-monthly paychecks. If your income and the rate of consumption remain the same, compute (i) the transaction demand for money, and (ii) transaction velocity of money)

Answer 1

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Question:

Answer:

a). Answer:

i). Answer:

Monthly income = RM1000

[Assume a constant consumption rate during the month. Compute.]

The transaction demand for money =Here, worker has received the income of RM1000 and spend it over the month. So, his cash balamce beggining of the month is RM1000 and end of the month is RM0.

For seller beggining of the month is RM0 and end of the month is RM1000.

Average monthly holding of worker = (1000 + 0)/2 = RM500

Average monthly holding of seller = (0 + 1000)/2 = RM500

Total transaction demand for money = 500 + 500 = RM1000

ii). Answer:

Transaction velocity of money = Total Transactions/ Average Money supply

Total  Transactions = 1000 + 1000 = RM2000

Money supply = RM1000

Transaction velocity of money = RM2000/RM1000

Transaction velocity of money = 2

b). Answer:

i). Answer:

Average weekly holding of worker = (500 + 0)/2 = RM250

Average weekly holding of seller = (500 + 0)/2 = RM250

Total monthly holding of worker = RM500

Average monthly holding of seller =RM500

Total transaction demand for money = 500 + 500 = RM1000

Transaction velocity of money = Total Transactions/ Average Money supply

Transactions per week = 500 + 500 = RM1000

Transactions per week = 2 * RM1000 = RM2000

Money Supply = RM500

Transaction velocity of money = RM2000/RM500 = 4

Transaction velocity of money = 4

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