In a commercial sector of an economy, the total stock of money in circulation (M) is \text… — JAMB UTME

In a commercial sector of an economy, the total stock of money in circulation ( $M$ ) is $\text{N}12,000,000$ and the velocity of circulation ( $V$ ) is $5$ . If the total physical volume of transactions ( $T$ ) is $1,500,000$ units, what is the general price level ( $P$ ) according to Fisher's Quantity Theory of Money?

Answer: 40 Naira

Answer

The general price level (

P

) is

\text{N}40

According to Irving Fisher's Quantity Theory of Money equation (

MV = PT

), the general price level

P

is determined by dividing total monetary expenditures (

M \times V = 12,000,000 \times 5 = 60,000,000

) by the physical volume of transactions (

T = 1,500,000

). This calculation gives

P = 40

Step-by-Step Solution

State Fisher's Quantity Theory of Money equation

MV = PT

Fisher's identity equates total money expenditure (

MV

) with the total value of goods and services exchanged (

PT

Rearrange the identity to isolate the general price level (

P

)

P = \frac{MV}{T}

This provides the formula needed to calculate

P

directly from

M

V

, and

T

Substitute the values and compute the result

P = \frac{12,000,000 \times 5}{1,500,000} = 40

Multiplying money supply by velocity gives total turnover of

\text{N}60,000,000

, which divided by transaction volume

1,500,000

yields

40

Key Concept

Fisher's Quantity Theory of Money Equation (MV = PT)

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