CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking
Using the Fisher equation MV = PT, in an economy the money supply is Rs 400 crore, velocity of circulation is 5 and the volume of transactions is 1,000 crore units. What is the price level P?
The price level is Rs 2. Total spending MV equals 400 crore times 5, which is Rs 2,000 crore. Dividing by the 1,000 crore units of transactions gives P equal to Rs 2. Inverting the ratio mistakenly would give Rs 0.50.
- ARs 2Correct
- BRs 0.50
- CRs 5
- DRs 2,000
Explanation
MV = 400 x 5 = 2,000 crore. P = MV/T = 2,000/1,000 = Rs 2. Check: 2 x 1,000 = 2,000, which equals MV. Rs 0.50 comes from inverting the ratio.
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