In an island economy, the physical volume of transactions (T) during a fiscal year is 40,0… — JAMB UTME

In an island economy, the physical volume of transactions ( $T$ ) during a fiscal year is $40,000$ units and the average price level ( $P$ ) is $15$ units of currency per transaction. If the total stock of money ( $M$ ) in circulation is $50,000$ units of currency, what is the velocity of money circulation ( $V$ )?

Answer: 12

Answer

The velocity of money circulation (

V

) is 12.

According to Fisher's Equation of Exchange (

M \times V = P \times T

), total monetary expenditure equals total nominal transactions. Substituting

M = 50,000

P = 15

, and

T = 40,000

yields

50,000 \times V = 15 \times 40,000 = 600,000

. Dividing

600,000

50,000

gives

V = 12

Step-by-Step Solution

Identify the relevant formula from the Quantity Theory of Money.

Fisher's Equation of Exchange:

M \times V = P \times T

This equation relates total money supply (

M

), velocity of circulation (

V

), general price level (

P

), and volume of transactions (

T

Substitute the given numerical values into the equation.

50,000 \times V = 15 \times 40,000

Given

M = 50,000

P = 15

, and

T = 40,000

Solve for the velocity of money circulation (

V

V = \frac{600,000}{50,000} = 12

Dividing the total monetary value of transactions (

P \times T

) by the quantity of money in circulation (

M

) gives the speed at which money circulates.

Key Concept

Fisher's Quantity Theory of Money and Equation of Exchange

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