Q.In an economy the money supply is ₹1,000 crore, the velocity of circulation is 8, and the total volume of transactions is 4,000 crore units of goods. Using Fisher's equation of exchange, find the general price level.

Fisher's equation MV = PT can be rearranged to find the price level as P = MV / T, since total spending must equal the money value of goods sold.

P = (1000 × 8) / 4000 = 8000 / 4000 = 2.

Fisher's equation of exchange states that total money spent equals the total money value of goods transacted:

We are given the money supply $M = 1000$ crore, velocity $V = 8$, and transactions $T = 4000$ crore units. We must find the price level $P$.

Step 1 — Rearrange for P.

Step 2 — Substitute the values.

Step 3 — Verify (independent check). Compute both sides of the identity with P = 2: left side MV = 1000 × 8 = 8000; right side PT = 2 × 4000 = 8000. Since MV = PT = 8000, the identity balances, confirming the answer.

Alternatively, read the equation directly: total spending MV = 8000 must equal the value of goods PT. Since 4000 units are traded, the price per unit that makes their value equal 8000 is 8000 ÷ 4000 = 2.

A common error is to multiply instead of divide, or to divide by V instead of T. Always rearrange the identity carefully: to isolate P, divide the whole left side (MV) by T. Also keep units consistent — M and T are both in 'crore' here, so the crore cancels and P comes out as a pure index number.