CA Foundation · Business Economics · Money Market
Under the Cambridge cash balance approach, the demand for money is expressed as Md = kPY, where k is the proportion of money income people wish to hold as cash. If nominal national income PY is ₹8,00,000 crore and k is 0.25, what is the demand for money?
Money demand is ₹2,00,000 crore. The Cambridge equation multiplies the proportion of income held as cash, k of 0.25, by nominal income of ₹8,00,000 crore. This gives one-fourth of income. Dividing by k instead would wrongly give ₹32,00,000 crore.
- A₹2,00,000 croreCorrect
- B₹32,00,000 crore
- C₹8,00,000 crore
- D₹20,000 crore
Explanation
Md = k × PY = 0.25 × 8,00,000 = ₹2,00,000 crore. Check: this equals one-fourth of income, consistent with k = 0.25. Option B divides income by k instead of multiplying, which is the common error.
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