Question

14. An individual receives a paycheque for a monthly income of $3000 at the beginning of each month and spends at a constant rate so that the total amount is spent by the end of the month. According to the Baumol-Tobin optimal cash managemènt approach, the average cash holding in any given month is a) $3000 b) $2000 c) $1500 d) $1000 15. According to the quantity theory of money, the velocity of circulation can be calculated a) by dividing the nominal income level by the stock of money. b) by dividing the real income level by the stock of money. c) by multiplying the nominal income level by the stock of money d) by dividing the nominal income level by the price level.

Answer 1

14. Assuming that the individual withdraws the entire $3000 at once at the starting of the month, the average cash holding will be $3000/2=$1500(c).

15. The quantity theory of money states that

M*V=P*Y, where PY is the nominal income, V is velocity of circulation and M is the money supply/ stock of money.

a) by dividing the nominal income level by the stock of money.