TutorOn by Sanath Withanage

Question:

Based on the Equation of Exchange, if Y = 500, M = 400 and V = 5, then P =
(1) 1/4
(2) 4
(3) 6.25
(4) 80
(5) 100

Correct Answer:

(2)

Answer Explanation:

The Equation of Exchange is MV = PY (Money Supply x Velocity = Price Level x Real Output). Plugging in the values: 400 x 5 = P x 500 $rightarrow$ 2000 = 500P $rightarrow$ P = 2000 / 500 = 4.

Topic: Inflation Year: 2022