An economy initially has a money supply of ₦2,000 million and a velocity of money circulat… — JAMB UTME

An economy initially has a money supply of ₦ $2,000$ million and a velocity of money circulation of $4$ . Following financial sector reforms, the money supply expands by $25\%$ while the velocity of circulation rises to $5$ . If the total volume of real economic transactions remains constant at $500$ million units, what is the new general price level according to Fisher's Quantity Theory of Money?

A
₦20.00
₦25.00Answer
C
₦12.50
D
₦0.04

Answer

The new general price level is ₦25.00.

According to Irving Fisher's Quantity Theory of Money equation (

MV = PT

), the new money supply is calculated as

₦2,000 \text{ million} \times 1.25 = ₦2,500 \text{ million}

. Multiplying this expanded money supply by the new velocity of circulation (

5

) yields a total monetary expenditure of

₦12,500 \text{ million}

. Dividing this by the fixed physical volume of transactions (

500 \text{ million units}

) produces the correct new general price level of ₦25.00.

Step-by-Step Solution

Calculate the updated money supply (

M_1

) after the 25% expansion

M_1 = ₦2,000 \text{ million} \times (1 + 0.25) = ₦2,500 \text{ million}

The money supply increased by 25% from its baseline of ₦2,000 million.

Identify the updated parameters for Fisher's Quantity Theory equation (

MV = PT

)

M = 2,500

V = 5

T = 500

The new velocity of circulation is given as 5 and the volume of physical transactions is constant at 500 million units.

Rearrange Fisher's equation to solve for the general price level (

P

)

P = \frac{M \times V}{T}

Dividing total monetary expenditure (

MV

) by total transaction volume (

T

) yields the price per transaction unit.

Substitute the values and compute the price level

P = \frac{2,500 \times 5}{500} = \frac{12,500}{500} = ₦25.00

Performing the arithmetic calculation gives the updated price level.

Key Concept

Fisher's Quantity Theory of Money (MV = PT)

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