In the equation ππ = ππ, π ππππππ πππ‘π
-
- Value of money
- Velocity of circulation of money
- Variation of national income
- All of the above
Correct answer: Velocity of circulation of money
Β Answer Explanation
V represents the velocity of circulation of money in the equation MV = PY. According to the Quantity Theory of Money, the total nominal expenditure in an economy (MV) equals the total nominal output. The velocity of money measures how many times, on average, a unit of currency changes hands in a given period to support transactions in the economy. Quantity Theory of Money is represented by the equation MV = PY where,
- M represents the amount of money available,
- V represents velocity of circulation of money
- P represents the price level.
- The nominal output or national income is represented by Y.
The velocity of money circulation (V) indicates how often a unit of currency changes hands within a given time period to facilitate economic transactions. As a result of various transactions, like buying goods and services, making investments, or paying wages, it represents the speed at which money circulates from one person to another.
Why the other options are not correct
a. Value of money:
In the equation MV = PY, M stands for the money supply, which is the total amount of money in circulation within an economy. Money value is not explicitly expressed by V, but by the total amount of money in circulation.
c. Variation of national income:
The equation MV = PY does not represent national income variation. Instead, it shows the relationship between the money supply (M), the velocity of money (V), the price level (P), and the total nominal output (Y). Based on the equation, the price level and national income are equal to the product of the money supply and velocity of money.
d. All of the above:
Although the equation MV = PY encompasses the variables representing money supply (M), velocity of money (V), price level (P), and national income (Y), option (d) does not distinguish between the specific variable represented by V, the velocity of money circulation. It is not correct because it implies that all answers are correct which is not correct.
Conclusion
According to the Quantity Theory of Money, MV = PY represents a relationship between the money supply, the velocity of circulation of money, the price level, and the total nominal output in an economy. As indicated in the equation, the velocity of circulation of money (V) is the correct representation of the variable.
An economy’s monetary activity is measured by how frequently money changes hands to support economic transactions.
Which property the paper money does not possess:
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.