According to Fisher's Quantity Theory of Money represented by the equation MV = PT, if an … — JAMB UTME

According to Fisher's Quantity Theory of Money represented by the equation $MV = PT$ , if an economy has a total money supply ( $M$ ) of $\text{N}400\text{ million}$ , an average price level ( $P$ ) of $\text{N}20$ , and a total volume of transactions ( $T$ ) of $100\text{ million}$ units, what is the velocity of money circulation ( $V$ )?

5Answer
B
0.2
C
80
D
20

Answer

According to Irving Fisher's Quantity Theory of Money (

MV = PT

), total expenditure (

MV

) equals total monetary value of goods and services traded (

PT

). Solving for velocity gives

V = \frac{PT}{M}

. Substituting

P = 20

T = 100\text{ million}

, and

M = 400\text{ million}

results in

V = \frac{2000}{400} = 5

Step-by-Step Solution

Identify the given variables in the Quantity Theory of Money equation (

MV = PT

)

Money supply (

M

) =

\text{N}400\text{ million}

, Price level (

P

) =

\text{N}20

, Volume of transactions (

T

) =

100\text{ million}

units.

Establishing the known values enables correct substitution into Fisher's equation.

Rearrange the equation to isolate the unknown variable, velocity of money (

V

)

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

Algebraic rearrangement is required to solve for

V

directly.

Substitute the values into the formula and calculate

V = \frac{20 \times 100\text{ million}}{400\text{ million}} = \frac{2000}{400} = 5

Dividing total nominal transaction value by money supply gives the number of times a unit of money changes hands.

Key Concept

Fisher's Quantity Theory of Money (

MV = PT

)

Estimated Time:1m 15s

Question

Answer

Step-by-Step Solution

Key Concept

Common Mistakes

Topics

More questions from this topic