In a local market economy, the total stock of money in circulation (M) is \text{N}2,500,00… — JAMB UTME

In a local market economy, the total stock of money in circulation ( $M$ ) is $\text{N}2,500,000$ , and the velocity of circulation ( $V$ ) is $6$ . If the total volume of physical transactions ( $T$ ) is $300,000$ units, what is the general price level ( $P$ ) per unit in Naira?

Answer: 50 Naira

Answer

The general price level (

P

) is

\text{N}50

per unit.

According to Fisher's Equation of Exchange (

MV = PT

), substituting

M = \text{N}2,500,000

V = 6

, and

T = 300,000

gives

15,000,000 = 300,000P

. Solving for the general price level (

P

) yields

P = \frac{15,000,000}{300,000} = 50

Naira per unit.

Step-by-Step Solution

Identify the given variables for Fisher's Equation of Exchange

M = \text{N}2,500,000

V = 6

, and

T = 300,000

units.

Establishing known variables is necessary to solve for the unknown parameter

P

Calculate total monetary expenditure (

MV

)

MV = 2,500,000 \times 6 = 15,000,000

According to the Quantity Theory of Money, total spending (

MV

) equals total value of goods traded (

PT

Divide total monetary expenditure by the transaction volume (

T

) to isolate

P

P = \frac{15,000,000}{300,000} = 50

Dividing total monetary outlay by total units traded yields the average price level per unit.

Key Concept

Fisher's Quantity Theory of Money (Equation of Exchange

MV = PT

)

Estimated Time:1m 15s

Question

Answer

Step-by-Step Solution

Key Concept

Common Mistakes

Topics

More questions from this topic