IAI Actuarial Core Principles · Business Economics · Role of money and interest rates in the economy
An economy has a money supply of ₹40 lakh crore, velocity of circulation of 5, and real output of 100 lakh crore units priced at a general price level P. Using MV = PY, what is the price level P?
The price level is 2.0. Nominal spending is money supply times velocity, which is 40 x 5 = 200 lakh crore, and dividing by real output of 100 lakh crore gives a price level of 2.0.
- A1.0
- B2.0Correct
- C0.5
- D8.0
- 2.5
Explanation
MV = 40 x 5 = 200. P = 200 / 100 = 2.0. Check: 2.0 x 100 = 200. Option 0.5 inverts the ratio, and 1.0 ignores velocity by comparing 40 with 100 incorrectly.
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