In a developing economy, the volume of real physical transactions (T) in a given year is 6… — JAMB UTME

In a developing economy, the volume of real physical transactions ( $T$ ) in a given year is $600,000$ units. The stock of money in circulation ( $M$ ) is ₦ $150,000$ , and each unit of currency turns over $8$ times per year on average. Based on Irving Fisher's Quantity Theory of Money equation ( $MV = PT$ ), what is the general price level ( $P$ ) in this economy?

A
₦0.50
₦2.00Answer
C
₦4.00
D
₦32.00

Answer

The general price level (P) is ₦2.00.

According to Fisher's Quantity Theory of Money,

MV = PT

. Substituting

M = 150,000

V = 8

, and

T = 600,000

gives

150,000 \times 8 = P \times 600,000

. Simplifying gives

1,200,000 = 600,000P

, so

P = \frac{1,200,000}{600,000} = ₦2.00

Step-by-Step Solution

State the Fisher Quantity Theory of Money equation of exchange.

MV = PT

This formula establishes that total money expenditure (

MV

) equals total transaction value (

PT

Substitute the given values into the equation.

150,000 \times 8 = P \times 600,000

We are given

M = ₦150,000

V = 8

, and

T = 600,000

Calculate the total monetary expenditure (

MV

MV = 1,200,000

Multiplying the money stock by velocity gives total spending in the economy.

Solve for the price level (

P

P = \frac{1,200,000}{600,000} = ₦2.00

Dividing total monetary expenditure by the volume of real transactions gives the price per unit.

Key Concept

Fisher's Quantity Theory of Money (Equation of Exchange)

Question

Answer

Step-by-Step Solution

Key Concept

Common Mistakes

Topics

More questions from this topic