A commercial town has a total money supply (M) of ₦2,000 with a velocity of circulation (V… — JAMB UTME

A commercial town has a total money supply ( $M$ ) of ₦2,000 with a velocity of circulation ( $V$ ) of $4$ . If the physical volume of transactions ( $T$ ) in the town is $400$ units, what is the general price level ( $P$ ) based on Fisher's Quantity Theory of Money equation ( $MV = PT$ )?

Answer: 20 ₦

Answer

The general price level (

P

) is ₦20.

Using Fisher's Equation of Exchange (

MV = PT

), rearranging to solve for price level gives

P = \frac{MV}{T}

. Substituting

M = 2000

V = 4

, and

T = 400

yields

P = \frac{2000 \times 4}{400} = 20

. Therefore, the price level is ₦20.

Step-by-Step Solution

State the Quantity Theory of Money equation.

MV = PT

Irving Fisher's equation equates total monetary spending (

MV

) with the total value of goods and services traded (

PT

Isolate the price level variable (

P

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

Dividing both sides of the equation by

T

allows direct calculation of the unknown price level.

Substitute the values and calculate.

P = \frac{2000 \times 4}{400} = 20

Multiplying money supply (2000) by velocity (4) gives a total monetary output of 8000, which divided by total transactions (400) gives 20.

Key Concept

Fisher's Quantity Theory of Money Equation of Exchange

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