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5 July, 13:56

Which one of the following statements is the MOST accurate?

A) A rise in the average value of transactions carried out by a household or a firm causes its demand for money to fall.

B) A reduction in the average value of transactions carried out by a household or a firm causes its demand for money to rise.

C) A rise in the average value of transactions carried out by a household or a firm causes its demand for money to rise.

D) A rise in the average value of transactions carried out by a household or a firm causes its demand for real money to rise.

E) a decrease in the average value of transactions carried out by a household or a firm causes its demand for real money to rise.

D

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  1. 5 July, 14:11
    0
    D) A rise in the average value of transactions carried out by a household or a firm causes its demand for real money to rise.

    Explanation:

    In economics, the average value of transactions the total value of transactions divided by the total number of transactions carried out. The higher the average value of transaction, the higher the demand for real money.

    Real money is money that considers the effect of inflation, compared to nominal money that does not consider the inflation effect.

    The equation for real money is expressed as the nominal money divided by the price level as given below:

    Real money = M/P

    Where M is the nominal money and P is the price.

    If the percentage increase in nominal money is equal to the percentage increase in average value of transactions, the increase in the nominal money may not be enough to cover the increased transactions. But, if the real money is considered, the same percentage increase in the real money as that of the percentage increase in average value of transactions will be enough to take care of the increased transactions.

    Therefore, a rise in the average value of transactions carried out by a household or a firm causes its demand for real money to rise.

    I wish you the best.
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