IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features
An economy has money supply of Rs 800 crore, velocity of 5 and a price index such that nominal spending equals MV. Real output is Rs 2,000 crore at base prices (price index 1.00 at base). Using MV = PT, what is the price level P?
Nominal spending MV equals 800 times 5, which is Rs 4,000 crore. Dividing by real output of Rs 2,000 crore gives a price level P of 2.00. Ignoring velocity would wrongly give 0.40.
- A2.00Correct
- B0.40
- C1.60
- D2.50
- 4.00
Explanation
MV = 800 × 5 = 4,000. P = 4,000 / 2,000 = 2.00. Check: 2.00 × 2,000 = 4,000. Option 0.40 inverts the ratio (2,000/ 4,000 is 0.5, and 800/2,000 is 0.40, ignoring V).
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