THE RELATIONSHIP BETWEEN MONEY SUPPLY AND LEVEL OF NATIONAL INCOME IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

Views about the important of money in the working of the economy vary greatly.  In particular, the means by which money affects income and output and the extent to which changes in money supply (that is money stock ) affect the economy are two issues that have given Nise to a major debate between two group of economists distinguished by their adherence to two conflicting bodies of economic theory called Keynesians and Monetarism. The debate has been long and complicated and has progressed through several stages over the years.  This debate is important implications for the effectiveness of monetary policy and the importance of monetary policy relative to fiscal policy, in affecting income, output, employment and the rate of inflation. The relationship between the stock of money and the level of income and output is fundamental to the monetarism and Keynesians debate.

1.2   STATEMENT OF PROBLEM

There have been a thousand and one views on the relationship between money supply and certain macroeconomic variables such as national income, price, and levels. The controversy on the on the rule of money vis-à-vis national income and price level has been going on for quite a long time before the great depression of 1930s, economists believed that increases in the quantity of money would lead to increases in the price level (inflation). However, during he great depression group of economists emerged. They held that the important factor caused income and employment to fluctuate is investment.

Thos group of economists believed hat money is not an important determinant of the level of economic activity while a separate group with a contrary view believed that money is an important determinant of level of economic activity. They also believed that once there is unemployment in the economy, increase in money supply. Leads to increases in the level of income. This group of economist supported their assertion with a lot of empirical evidence, base on the above analysis, a lot of question arose. These question include, is money supply an important determinant of economic activity in Nigeria? Furthermore, is there any relationship between money supply and level of national income in Nigeria? The above research questions form the problem of this research therefore; an attempt would be made to ascertain the effects of money supply on the Nigerian economy.

1.3   OBJECTIVE OF THE STUDY

The specific objectives of this research include the following: To find out whether or not there was a relationship between money supply and the level of national income in Nigeria during the period under review. The study also intended to investigation and discover which of the views about the monetary theory holds in the Nigerian context. It also ascertains to find out which of the monetary aggregates affects economic more than the others in Nigeria.

1.4   SIGNIFICANCE OF STUDY

This research work on the relationship between money supply and the level of national income in Nigeria would be of immense value t the central bank of Nigeria (CBN). The result of the research would enable the central ban of Nigeria to reform it’s primary function more effectively especially of regulating the amount of money in circulation.

This research work would enable the CBN to successfully and most efficiently carry on this function in accordance with the prescribed goals, aims or objectives of the government. Moreover, Nigeria government or the ministry of finance, policy makers and even other researcher has a lot to gin from this research. It would also benefit students, scholars and the generality of the people who offer going through the various views and theories about the role of money supply on the economic achieving.

1.5  DEFINITION OF TERMS

Money supply simply means the total amount of money in the economy at a given point in time.

National income is the sum of all payments to factor of production. It includes compensation of employees, rent, interest and profit. It is also known as Gross National product (GNP) or Gross Domestic product (GDP).

In the other hands, National income is defined as collective wealth of a nation.

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