Nov 2004 paper 3 question 24

[arvind0708]

24 Assuming a constant income velocity of circulation of money, if real output grows by 5 %, and the
money supply grows by 2 %, what will be the approximate change in the price level?
A –3 % B +2 % C +3 % D +7 %

what calculation need to be done.

 

[JACK HERROR]

for this question you have to use the Quantity Theory of Money formula, that is, mv=pq
where m-money ss
v=velocity of circulation
p=price
q=output
pq= money ny
if q increase by 5% , money ss by 2% and v constant then you replace in the eqn, then
p should decrease by 3%

ans a