IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features
In a classical economy, real output is fixed at full employment at ₹800 crore and the velocity of money is constant at 4. Using the quantity theory MV = PY, the central bank raises the money supply from ₹150 crore to ₹180 crore. What is the resulting percentage change in the price level?
The price level rises by 20%. With output fixed at ₹800 crore and velocity at 4, price moves in proportion to money: money grows from ₹150 crore to ₹180 crore, which is 20%, so the price index goes from 0.75 to 0.90.
- ANo change, since real output is fixed
- BRise of 30%
- CRise of 12.5%
- DRise of 20%Correct
- Rise of 25%
Explanation
Initially P = 150×4/800 = 0.75. After the change P = 180×4/800 = 0.90. The rise is 0.15/0.75 = 20%, equal to the money growth of 30/150. Option A ignores that Y and V are fixed, so P must absorb the change.
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