A West African country records a general price level (P) of \text{N}250 per transaction un… — JAMB UTME

A West African country records a general price level ( $P$ ) of $\text{N}250$ per transaction unit and a total volume of physical transactions ( $T$ ) of $800,000$ units per year. If the velocity of money circulation ( $V$ ) is $5$ , calculate the required total money supply ( $M$ ), in millions of naira, according to Fisher's Quantity Theory of Money equation ( $MV = PT$ ).

Answer: 40 million naira

Answer

The total money supply (

M

) required is 40 million naira.

According to Irving Fisher's Quantity Theory of Money,

MV = PT

. Substituting

V = 5

P = 250

, and

T = 800,000

gives

5M = 200,000,000

. Dividing both sides by

5

yields

M = 40,000,000

naira. Converting to millions of naira gives 40.

Step-by-Step Solution

Identify the given variables from the context.

P = 250

T = 800,000

V = 5

These are the parameter inputs required for Fisher's Equation of Exchange.

Apply Fisher's Quantity Theory of Money formula.

MV = PT

This formula establishes the macroeconomic equilibrium between monetary flow and total transaction value.

Substitute the values and solve for

M

5M = 250 \times 800,000 \implies 5M = 200,000,000 \implies M = 40,000,000\text{ naira}

Dividing the total transaction expenditure by velocity isolates the money stock.

Express the money supply in millions of naira.

40\text{ million naira}

The unit requested in the question stem is millions of naira.

Key Concept

Fisher's Quantity Theory of Money (Equation of Exchange

MV = PT

)

Estimated Time:1m 30s

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