macroeconomics doubt

[Homer Simpson]

According to guidelines of country X, all savings bank account holders have to maintain 10,000 as their average monthly balance or face penalty of 250 at the end of the month. Earlier, the average quarterly balance was required to be 10,000. otherwise, a deduction of 750 as penalty at the end of the quarter.

What do you think would be the effect on velocity of money, funds available for banks due to this, given this monthly system?

[Anjali]

Wild guess - velocity of money will decrease

[Granpa Simpson]

According to me in this case the money demand parameter (k) will decrease since people will be induced to keep the required amount monthly leading to a decrease in monthly money demand parameter and hence increase in the velocity of money, since money demand parameter k and velocity are inversely related.

[Anjali]

In this case , @subhayu , is average monthly balance , the deposits of people , that they kept with bank in their savings account ? If yes , then , velocity will increase .

[Granpa Simpson]

braodly banks have current account, savings deposits and time deposits....current deposits are given for working capital finances and term deposits are generally not used within a certain period of time for transactions..the only thing which affects the transaction process is the inflow and outflow of the savings bank a/c...in this case thus the amount fined is on the savings deposit account which a person is assumed to operate through depositing and taking out of cash.

[Homer Simpson]

thanks subhayu  additionally, can you confirm this point please? if the penalty for not maintaining average balances goes up, then velocity of money should increase as well, as i would expect transactions demand for money (k) to fall?

[Anjali]

Thanks subhayu !

[CHANGEZ]

velocity is how much times a money change hands. In this case, because of new constraint that is maintaining monthly average, will lower the velocity.

[Granpa Simpson]

Absolutely on the point Tsuki...dat's the underlying logic..:)