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CA Foundation · Business Economics · Money Market

In the Fisher quantity equation MV = PT, the money supply is ₹2,000 crore, the velocity of circulation is 6 and the volume of transactions is 4,000 units. Assuming V and T stay unchanged, what is the price level P, and what will it be if money supply rises to ₹2,500 crore?

The price level is ₹3 initially and rises to ₹3.75. From MV = PT, P = (2,000 × 6)/4,000 = 3. With money supply at ₹2,500 crore, P = (2,500 × 6)/4,000 = 3.75, showing prices rise proportionately with money supply when V and T are fixed.

  1. AP = ₹3 and then ₹3.75Correct
  2. BP = ₹3 and then ₹2.40
  3. CP = ₹2.40 and then ₹3
  4. DP = ₹0.33 and then ₹0.27

Explanation

P = MV/T = (2,000 × 6)/4,000 = ₹3. With M = 2,500, P = (2,500 × 6)/4,000 = ₹3.75. Check: 3.75/3 = 1.25, the same as 2,500/2,000. The option giving ₹2.40 inverts the relation between M and P.

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