In a regional agricultural market, the total stock of money in circulation (M) is ₦80,000 … — JAMB UTME

In a regional agricultural market, the total stock of money in circulation ( $M$ ) is ₦80,000 and the average price level ( $P$ ) per unit of output is ₦250. If the physical volume of transactions ( $T$ ) recorded during the period is 1,600 units, calculate the velocity of circulation ( $V$ ) of money.

Answer: 5

Answer

The velocity of circulation of money (

V

) is 5.

According to Irving Fisher's Quantity Theory of Money (

MV = PT

), the total monetary flow in an economy (

MV

) equals the total nominal value of transactions (

PT

). Substituting

M = 80,000

P = 250

, and

T = 1,600

into the equation gives

80,000 \times V = 400,000

. Solving for

V

yields

V = 5

, meaning each unit of currency changed hands 5 times on average during the period.

Step-by-Step Solution

Identify the given parameters and select the appropriate formula

Money supply (

M

) = ₦80,000, Price level (

P

) = ₦250, Volume of transactions (

T

) = 1,600. Use Fisher's Equation of Exchange:

MV = PT

Irving Fisher's equation establishes that total money spending (

MV

) equals total value of goods and services traded (

PT

Substitute the numerical values into the equation

80,000 \times V = 250 \times 1,600

Plugging the known quantitative values isolates

V

as the single unknown variable.

Solve for the velocity of circulation (

V

)

80,000 \times V = 400,000 \implies V = \frac{400,000}{80,000} = 5

Dividing total monetary outlay (

PT

) by total money stock (

M

) determines how many times a unit of currency changes hands on average.

Key Concept

Fisher's Quantity Theory of Money Equation of Exchange (

MV = PT

)

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Answer

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