Correct Option
The correct option is 1 only
Explanation
The Transaction Demand for Money refers to the amount of money individuals and firms hold to facilitate day-to-day exchanges. It arises from the medium of exchange function of money and the fact that the timing of income receipt and expenditure is not perfectly synchronized.
Statement-wise Analysis
- Statement 1 is Correct: In a simplified two-person economy consisting of a Firm and a Worker, if the worker receives a monthly income (Y) at the beginning of the month and spends it uniformly throughout the month, their cash balance starts at Y and drops to 0 by the end of the month. The average money holding is calculated as \(\frac{Y + 0}{2} = \frac{Y}{2}\). Similarly, the firm pays out income at the start (balance drops to 0) and accumulates revenue uniformly as the worker spends (balance rises to Y), resulting in an average holding of \(\frac{Y}{2}\).
- Statement 2 is Incorrect: The transaction demand for money is directly related to the total volume of transactions in an economy. As the value or volume of transactions (often approximated by nominal GDP) increases, individuals and firms require more liquidity to conduct these transactions.
- Statement 3 is Incorrect: Transaction demand is dependent on the timing of income receipts and expenditure intervals. For example, if a worker is paid weekly instead of monthly, their average cash holding would decrease significantly because the interval between receipt and exhaustion of funds is shorter.
Key Takeaway
Transaction demand for money is a positive function of the total value of transactions (or income) and is inversely related to the velocity of money circulation (frequency of income receipts).