The Effect of Macro Economic Policy on Nigerian Economics Growth and Development
This research work focus on the appraisal of Macroeconomic Policy on Inflation in Nigerian Economy, also to determine how it enhances the growth of Nigerian Economy. The aim of this research work is to look into challenges and numbers of hypothesis were drawn. Information necessary to address the test of hypothesis was gathered through secondary data, source from Central Bank of Nigeria (CBN).
Economic analysis was used to formulate the three (3) models that were stated in this research work.Multiple regressions were also used to test the appraisal of Macroeconomic Policy on Inflation in Nigerian Economy. The findings of this research show that macro-economic policy as a tool for Economic Policy and Growth as a Positive Effect on the Growth in Nigeria. In conclusion, government should ensure that operational problems are tackled prior to sale so that there would not be any barrier hindering the high degree of efficiency that is associated with the stability of the Nigerian economy.Over the years, Nigeria has made conscious and determined efforts to attain a high level of social and economic transformation of the economy in order to attain the development goals and including monetary policy, fiscal, policy, exchange control measures and income and price control. The measures adopted were changed from time to time to reflect the changing economic environment and circumstances. This work focuses on two of the policies adopted (monetary and fiscal policy) and examines their uses for economic growth and stability in Nigeria.
Since the main burden of aggregate economic policy must fall on either monetary policy and fiscal policy or a combination of both. The question arises as to whether to clear cut distinction can be made between policies which are termed “MONETARY” are those which are to be called “FISCAL” The truth is that considerable ambiguity about these terms exist and this often leads to useless debate and confusion. However, monetary policy can be as a measure which deals with the discretionary control of money supply by the monetary authorities with a view of achieving stated economic objectives.In other words, it employs the use of variation in the money supply to achieve economic objectives. Fiscal policy on the other hand may be defined as the policy pursued by a government to influenced economics activities in economy by changing the size and content of taxation, expenditure and public debt with a view to achieving given objective. Although, there two policies are independent tools of economics stabilization, they are often combined by most countries for a greater effect on the economy. Monetary and Fiscal policies as adopted in Nigeria have four broad objectives.
The objectives include:¬ •Maintenance of relative stability in domestic price •Attainment of a high and sustainable rate of economic development •Maintenance of balance of payment equilibrium growth and stability are so closely related that the economic policy o the government should include both of them. Economic growth may be judges from the growth it total output of the economy as measured by annual increases in net national prod, ct in constant price. Such a measure tells us how much bigger the total economy is becoming over a period of time, but it tells nothing about changes in the standard of living of the people in the economy.The more significant measures in the growth in real net national product divided by the number of people in the population. There are many targets of economic growth and development. They include. •Income distribution Gross national product Sectoral development (such as agriculture industries etc) •The pressure to attain economic stability or our economic is so strong that measures to promote federal government t fidget.
•To achieve the maximum practicable rate of growth, d is necessary to have stability. This does not mean a perfectly smooth rate of growth, but one that is not interrupted by recessions and depression. Stabilization policies that are usually released annually concerns attempts to stabilize the level of national income by ensuring that serious inflationary and deflationary gaps do not persist so that something close to full employment without rapid inflation can be achieved. The government uses the instruments of monetary and fiscal policies to influence economic growth and development. The instrument of monetary policy available to the Nigeria monetary authorities include: •Rediscount rate •Interest rate structure •Reserve requirement •Direct credit control •Exchange rate and •Moral suasionSome of the Fiscal policies relating to economy a growth and stability in Nigeria include: tax incentives (capital allowance, income tax relief, reconstruction tax exemption etc. relief from import duties, tariffs measures and budgetary measures. The government uses the instruments in achieving economic growth and stability.
1. 2STATEMENT OF PROBLEM This study is basically aimed at -Has there been effort to study the monetary and fiscal policies used by the Central Bank of Nigeria (CBN) in achieving economic growth and stability. -The ability to access the effectiveness of monetary and fiscal policies. Has there been recommendation to correct observed mistake by (CBN). If done, this will enable the monetary authorities to make optimal use of various monetary and fiscal tools at their disposal for rapid economic growth and stability. 1. 3AIM AND OBJECTIVES OF THE STUDY The general aim of this study is to examine the real problem of macroeconomic policy in Nigeria and propose some stabilization policies.
While specific objectives are: 1. To study the monetary and fiscal policies; used by the Central Bank of Nigeria (CBN) in achieving economic growth and stability. 2.To asses the effectiveness of monetary and fiscal policies 3. To make recommendation to correct observed mistake by the Central Bank of Nigeria (CBN) this will enable the monetary authorities to make optimal use of the various monetary and fiscal tool at their disposal for rapid economic growth and stability. 1. 4RESEARCH QUESTION Can monetary and fiscal policy be used as a tool to achieve economic growth? Could monetary and fiscal policy assess the effectiveness of monetary and credit policies? Does the policies of the Central Bank useful to achieve rapid economic growth and stability? 1.
5THE STATEMENT OF HYPOTHESISHYPOTHESIS 1 Ho-The monetary and fiscal policy, does not achieve economic growth and stability. HA-The monetary and fiscal policy achieve economic growth and stability. HYPOTHESIS 2 Ho-The effectiveness of monetary and credit policies could not be assess using the monetary an I fiscal policy. HA-The assess of effectiveness of monetary and credit policies will attain using monetary and fiscal policy. HYPOTHESIS 3. Ho-The observed mistake corrected by CBN could not be use to attain economic growth and stat lily. HA-Will correct the CBN from observed mistake so as to achieve rapid economic growth and stability.
1. RESEARCH METHODOLOGY The research work will make use of secondary data obtained from various institution and publication. The data will be obtained from Central Bank of Nigeria (CBN) Federal Office of Statistics (FOS), various publications from local and inter rational journal. The research work would be tested using regression analysis especially ordinary last square method will be used in construction the model. 1. 7 SIGNIFICANCE OF THE STUDY It is hope that this research work will be practically and theoretical significant to the household, firm and government and for the improvement of the whole economy.There is no doubt that this study will benefit quit a number of people especially units involved.
1. 8 THE SCOPE AND LIMITATION OF STUDY This study macro economic tools measure under the period of Structural Adjustment Programme (SAP) and mid seventy’s (70’s) (1978-2006) also in examining our effective and efficient the macro economic tools measures have change in the economy s nee 1970’s only the activities of commercial, merchant, special banks and central bank will be used. This will be done through looking into the financial indicators in the economy. -The number of banks in operation Money stock in the economy Growth of credit allocation Banks loan and advances Growth of bank loans and advances Average interest rate (%) A detail of this is in the date analysis which should be treated in further study. Most of the information and data used was collected mostly from Central Bank of Nigeria (CBN) through their annual reports bulleting and statement of account. This study shall be carried out exclusively in relation to the Nigeria economy. This study as comprehensive as possible except for some constraints encountered during the course of study.
There was a problem of time limit for the completion of the work. The regroup and hectic academic programmes which coincides with exams and period of the study or research was impediment. Inadequacy of data was also major constraint other limitations of the study are time period under study and lack of current year data. 1. 9ORGANISATION OF THE STUDY The project is structured into five chapters: Chapter One dealt with the introduction which includes brief description of Nigerian Economy, Area of merger in the economy, Relevant and Significance of the study, Definition of terms, Scope and Limitations.Chapter Two is mainly the Literature Review and Theoretical Frame Work of the study, the meaning and definition of Merger, motives of Merger and Acquisition, Merger game and the effect on the economy. Chapter Three based on the research method this include method of data collection, hypothesis to be tested and the statistical tools that are to be used.
Chapter Four dealt with the research methodology, data preparation and analysis. Chapter Five is the Summary, Recommendation and Conclusion of the research study. 1. 10DEFINITION OF TERMS 1.Central Bank of Nigeria (CBN): As he only financial institution established and charged with the day of day management and control of the nation’s monetary affairs, the supervision and co-ordination of banking and financial activities of the cc entry. 2. Monetary Policy: Can be described as measures that deal with the discretionary control of money supply try monetary authorities with a view to achieving stated economic objective.
3. Fiscal Policy: Can be desirable as the policy pursued by the government to influence economic activities in an economy. . IS CURVE: This is the locus of point r to of combinations of various level of rate interest (r) and the level of income (Y) that yields equilibrium in this product market. 5. LM CURVE: This is the locus of various combination of interest rates and level of income that brigs about equilibrium. CHAPTER TWO LITERATURE REVIEW 2.
1MEANING AND OBJECTIVE OF FISCAL AND MONETARY POLICIES Generally, fiscal policy is one of the many policies that are use by the government to influence economic activity of a country at a particular period.This policy involves the control of taxes and government expenditure. It is often called “power of the purse” instrument and it is design to effectuate changes in output and employment level to the desired standard especially in mixed and free market economies. Aigbokhan (1995) in his book defines fiscal policy as the use of government spending to influence economic outcome through taxation and expenditure or various forms of expenditure so government is directly spending.Fiscal policy like other government policies derives it meaning and direction from the goals and aspirations of the society within which it operate and the people whom it serves pursuits of the goals and aspirations in turn involves the acceptance of the following objective of the and budgetary policy. •To make available for economic development of the maximum flow with human and material resources consisting with minimum current consumption requirement. •To maintain reasonable economic stability in the face of long run inflationary pressure and short term international price movements.
To reduce where they exist, the extreme inequalities in which income and consumption standard. Fiscal policy plays an important role in less developed countries (LDCS) because the less per capital income and which lead to government controlling the economic activities because of the condition of the economy. Baunsgaard (2004) observes that fiscal policy in oil producing countries can be profoundly affected by oil revenue uncertainties and volatility. Policy formulation should factor in the exhaustibility of the natural resources and aim at reducing oil revenue volatility passed to the economy.Past fiscal policy in Nigeria has not been successful in this regard. Since both revenue and expenditure have been highly volatile to a large extent reflecting oil price level. On the other hand monetary policy refers to the combination of measure design to regulate the values, supply and cost of money in an economy in consonance with the level of economic activity.
Enoma (2002) in his book pin point’s monetary policy at controlling supply of money so as to counteract all undesirable trends in an economy may include disequilibrium in the balance of payment.In the same view, Soludo (2005) define “monetary policy action as any careful or conscious action undertaken by the monetary authority to change the quality, the availability and the cost of money in an economy to achieve a set objective”. There is a consensus of opinion that monetary policy is a policy which aims at influencing economic activities by variation in the supply of money availability of credit and/or in interest rate. In the formulation of monetary policy therefore some attention has to be given to the attainment of these major goals of macro economic policy. -Maintenance of high rate employment Maintenance of relative stability in prices -Achievement of high and sustainable rate of economic development -Maintenance of balance of payment equilibriumIn sum, the paramount of embrace objectives of monetary policy could be said to be stable economic growth. However as the foregoing discussions makes clear, the major role of monetary policy in making domestic and external sector stability and thereby creating the macro economics conditions for long term growth. The techniques (tools) by which the monetary authorities tries to achieve the above objective can be classifies broadly into two main categories.
a)The direct or portfolio control approach (b)The indirect or market intervention Under a system of direct monetary control, the monetary authority uses some criteria to determine monetary and credit targets and interest rate which are intermediate target to attempt to achieve that ultimate objective of policy. On the other hand, the indirect monetary controls due to the intermediate variables, particularly the market is left to determine investment and credit allocation. It is the attempt to manipulate these policy tools that essentially constitute conscious effort on the part of the authority to regulate the national economy.These tools are as follows: ¬ (a)Open market operation (b)Cash reserve requirement (c)Liquidity ratios (d)Stabilization securities (e)Discount window operation (f)Moral suasion OPEN MARKET OPERATION (OMO):- it involves discretionary power of the central bank to purchase or sell securities in the financial market in order to; influence the volume of liquidity and levels of interest rate which ultimately will affect money supply. When central bank purchases instruments, it infects money into the economy and bank ability to expand, credit is enhanced and vice versa.CASH RESERVE REQUIREMENT: – Cash reserve requirement are used to complement the operations of OMO. They are fixed as a proportion of bank deposits liabilities require to be deposited with the central bank.
They are particularly effective for sterilizing excess liquidity in the banking system and also can be easily monitored on a day basis because they are held by the central bank. LIQUIDITY RATIOS: – liquidity ratios are computed as a proportion of commercial and merchant banks current liabilities such as deposit liabilities, short term inter bank town net balance with foreign branches, and bank free balance with the central bank.Government debts instrument with a maturity of less than eighteen months. Liquidity ratio is used to complement OMO and it is potentially strong tool for restraining credit expansion. STABILIZATION SECURITIES: – Although the use of stabilization securities as an instrument of monetary policy is been de-emphasized essentially because policy has gradually shifted towards indirect control. This instrument of monetary control has been found to be inconsistent with the general philosophy of guided deregulation, although in the past, it had been very supportive of monetary policy.DISCOUNT WINDOW OPERATIONS:- The main goal of discount window operation is to provide collateralized overnight accommodation to discount house as well as banks that could not obtain funds on reasonable terms of discount and/or in the inter bank market.
MORAL SUASION: – This is regarded as a special appeal to banks by central banks. It plays useful role in monetary management as a supplementary tool. It enables close and constant interaction between market operations and central bank such interactions promotes understanding and engender mutual confidence between the central bank and the players in the country’s financial market. 2. ISSUES IN FISCAL AND MONETARY POLICIES In Nigeria monetary and fiscal policies have been implemented with the aim of achieving sustained economic growth, price stability and balance of payment viability. Utomi (2005) expresses his own view on monetary control following the Soludo solution on the use of effective monetary policy in 2006 by arguing that monetary restraints reduces the availability of credit and increases its interest cost, it was retarding the flow of expenditures, output and employment and incomes. While monetary case makes credit more available and reduces its interest cost and thus encourages an expansion in these flow.
However, a change in monetary policy may take the form of positive actions such as open market sales, increase in required reserve ratios or increase in discount rates which a policy of monetary ease to stimulate the expansion of expenditure will operate through the same process as are restrictive policy but in the reserved direction, such an expansive policy still tend to increase returns on treasury security to improve liquidity of banks to enhance wealth position of all holders of financial assets and to increase money supply.Soludo (2006) in an interview titled my vision for Nigerian banks recognize the expectation of the economy, Soludo said, “Money capital market should be expanded with the level that is consistent with the economy. To achieve this there should be a refocus more on the monetary function, if it possible to outsource the supervisions of banks”. Duesenberry (1964) argues that some people would like to rely or monetary policy as the primary instrument for controlling aggregate demand.In fact, some would like to see policy decision which influence demand taken out of the political arena while others would like to find a way to disconnect decisions about taxes and expenditures from the issues of employment and inflation. He further explained that fiscal and monetary policies in terms of an annually balanced budget or at least a balanced budget at a full employment level of income would then be possible. This is base on the fact that, monetary policy of a country is directed towards maintaining the right amount of money i.
. amount of money which will enable stable prices to be maintained and full employment to be shared without introducing balance of payment problems into the economy. Besides, some critics have attached the assumptions of flexibility in monetary policies. They recognized that it takes much less time to put monetary policy into operation than it does in fiscal policy. They propose that it takes longer for monetary measures to take hold, while fiscal policy on the other hand has a direct and powerful impact upon the income stream.Contrarily, monetary policy’s first impact is on the asset structure and only through its effect on this structure does it indirectly and with some days affect the income stream, thus heavy use of monetary policy lead to instability in financial markets, while the resulting fluctuations in security or bonds prices may run over it, a general fluctuation in monetary activity Siegel (1965). In addition, monetary policy is more effective in checking off boom condition than in generating recovering from recession condition.
If commercial banks reserves are under pressure from market serving operation coupled with a high discount rate and if investment is also largely financed by extension of bank credit, then further construction action by the Federal Reserve will cut deeply into the expenditure circuit and slow down or stop the expansion of the economy. Monetary policy appears to be of limited effectiveness in promoting the high level of employment and high growth rate objective but the economic growth can be best approached through the use of fiscal policy.In fact these few object are naturally re-enforcing rapid economic growth requires a high level of employment and full employment encourages the introduction of labour saving capital goods. Thus fiscal policy contributes directly to both employment and economic growth by increasing gross expenditure to maintain gross domestic product aggregate output level, Baunsgarrd (2004). He further emphasize that fiscal policy in oil producing countries can be profoundly affected by oil revenue uncertainty and volatility, policy formulation should factor in the xhaustibility of the natural resources and aim at reducing oil revenue volatility passed to the economy. However he painted out that past fiscal policy in Nigeria has not been successful in this regard since both revenue and expenditure have been highly volatile to a large extent reflecting oil prices level. Furthermore, Aigbokhan (1995) argues that in showing the relative effectiveness of monetary and fiscal policy, there is an issue which has engaged the attention of economist for decades that of the relative effectiveness of pure monetary policy and pure fiscal policy in influencing economic activities.
Pure monetary policy refers to the change in nominal money supply leaving government or taxes unchanged while pure fiscal policy is one which there are changes in government expenditure or taxes leaving nominal monetary supply unchanged. 2. 3KEYNES DEBATE ON MONETARY AND FISCAL POLICIES Keynes versus monetarist debate gives conflicting advice to government on the role and effectiveness of monetary policy.The Keynesian argue that the interest rate is the most important variable as a tool for the monetary authorities to control the economy, so they argue that monetary policy should be subsidiary to fiscal policy on the other hand, the monetarist argues that a steady growth in the money supply is the best policy to follow and that monetary policy’s directed to control money supply is one paramount important. Milton Friedman believes that monetary policy cannot be use to achieve an unemployment which is lower than the natural rate of unemployment.While the Keynesian view argued that monetary policy should be directed at interest rate rather than money supply and that monetary policy should at all times be subsidiary to fiscal policy. The monetarist argued and recommended that control of money supply should be the major concern of the monetary authorities.
The general instruments of activist policy are taxes, government spending and the money supply; activist policy can be classified as either monetary or fiscal policy.Keynes (1958) made changes in the long term rate of interest, the main instrument of monetary policy rather than changes in short term rates, he argued that the demand for working capital was insensitive to changes in short term interest rates but that the demand for fixed capital was responsive to changes in the long term rate of interest. Monetary policy is the deliberate control of the money supply and in some case, current condition for the purpose of achieving macro economic goals.Conversely, fiscal policy is the deliberate control of federal government spending and taxes structure and the determination of the volume of tax revenue such explicit purpose of attaining one or more specific objective such as full employment. The income and expenditure models pioneered by Keynes, view the role of money much differently from the classical quantity theory. He also viewed the link between money supply and desired aggregate expenditure in a different light. He rejected the two classical notions of fixed velocity and full employment.
In the Keynes model, monetary policy affects output indirectly through interest rate. Keynes defined fiscal policy as the deliberate use of government spending and taxes to achieve macro economic goal. Although, the federal government account for 44 percent of total (federal, state and local) government revenue and for 39 percent of total government expenditure fiscal policy is conducted through federal budget. In the Keynesian model, the link between increase in government spending and aggregated expenditure is vary directly.Keynes believes that during the 1980s, the world capitalist economies indeed reach equilibrium position but high level of unemployment made this position socially unacceptable. His fiscal policy is based on the premises that demand should be manipulated to ensure that the economy achieves an equilibrium level of income and output which is socially desirable. Although, Keynes rule out other possible sources for increase spending, leaving only government intervention as a dependable solutions to the problem.
2. THE IMPACT OF MONETARY AND FISCAL POLICIES ON THE NIGERIAN ECONOMY The public demand for money balances to hold depends on the level of income and the interest rate of money substituted. The higher the income the public has, the larger will be the money balances is wishes to hold, other things been equal, the higher the interest rate on money substitutes the lower will be the money balances it wishes to hold because higher interest rate will induce people to transfer more of their assets out of money (which yield on interest into securities or other asset which do yield interest).Besides, Imala (2003) emphasizes on the impact of monetary restriction. He argued that when banks excess reserves are squeezed, the prices they charge on credit, that is the interest rate are raised, but the lower the level of investment as well as gross domestic product, while the product market decreases. He further agues that credit become higher as interest rate rise, investors and consumers tries to avoid the pinch by reducing their money balances to the barest minimum needed to carry on their transactions and meet precautionary needs.He further argued that rationing of credit reduces the availability of credit and a quick effect in limiting business expansion than they do on higher interest rate while banks sells off part of their government securities to loans and limited by the volumes of securities the bank already have and falling government bond prices in many banks try to sell at once in the capital market.
However, a balanced budget seems appropriate when we are satisfied with the existing level of government autonomous expenditure roughly doing, the period of full employment without inflation (A balance budget policy is neutrals government policy that feeds back into the income stream just raise it withdrawal). In fact to avoid the deficit, the annual budget balance raise tax rate to get more money or reduces spending to match reduced tad receipt. If we therefore, believe that the government ought to be trying to expand total expenditure in credit to check the recession, the balance budget prescription to Nigeria economy is quite wrong.Similarly, inflation would generate a budget surplus calling for tax reduction and increase spending to avoid a budget surplus under an annually balance budget policy, this seems clearly than wrong prescription to stabilization purpose because it would speed the inflation ratio than cheating it in Nigeria economy. It should be well noted that the basic framework for stabilizing fiscal policy through government surpluses and deficit is simple and appealing if it is ascertained that the responsibility of government is to provide economic stabilization for the nation.The larger the excess of government expenditure over tax receipt (the larger the deficit) the stronger will be the expansionary effect of government fiscal policy. Other things been equal conversely, the larger the excess of tax receipt over expenditure (the large the surpluses) the more deflationary governments fiscal policy.
Some economist believes that when we want the government to exert strong expansionary pressure on national income a substantial government deficit is desirable. CHAPTER THREE THEORETICAL FRAMEWORK 3. THE THEORIES OF MONETARY AND FISCAL POLICIES Classical economist argues the importance of money as a determinant of aggregate demand. Their views on fiscal policy were less unanimous. During the great depression of the 1930s some of them recommended substantial increase in government spending as a way of increasing demand, output and employment others were quite skeptical about the effect of fiscal policy. The evidence provides little comfort for extreme Keynesians who focus their attention on fiscal policy and dismiss monetary policy as a mirage and a delusion.And it provide little support to the rigid monetarist who see the quantity of money playing a predominant role in the determination of aggregate demand irrespective of what is happening to fiscal policy.
We cannot count with any degree of certainty on the use of fiscal policy alone or monetary policy alone, there is a strong case to be made for using a combined strategy of monetary and fiscal expansions to combat recessions and a combined strategy of monetary and fiscal restraint to fight inflation.By not putting all our eggs in one basket, we may reduce the uncertainty we would face if we were to rely exclusively on either monetary policy or fiscal. Furthermore, there are other reasons for favouring a combination of monetary fiscal strategy. During a boom in aggregate demand, restrictive steps are desirable but restrictive actions are painful. When the government increases expenditure or cuts, taxes, deficit will rise thus money will be needed to cover this deficit and which can be borrowed in the financial market. This additional borrowing tends to push up the interest rate.A higher interest rate on the other hand causes a movement along the marginal efficiency of investment (MEI) curve, investment decreases.
D D Source: B. O. Iganige Figure 1: The effect of crowding out: The monetarist view This is little question that some crowing out take place, the issue is how strong the investment demand is relatively unresponsive to interest rates and that not must crowding of investments take place. Consequently fiscal policy is a powerful tool for controlling aggregated demand (and monetary policy is weak).Monetarist on the other hand, generally believe that MEI curve is relatively flat as shown in figure 1 and that deficit spending by the government tends to crowd out a relatively large amount of private investment. In casting doubt on the effectiveness of fiscal policy, monetarists make one important qualification. If the government deficit on demand by issuing new fiscal policy will have a powerful effect on demand, but monetarist attribute this effect to a changes in the money stocks, not the government deficit itself.
They see pure fiscal policy as having little influence on demand.Pure fiscal policy involves a change in government spending or tax rate unaccompanied by any change in the rate of growth of the money stock. 3. 2 THE RELATIONSHIP BETWEEN MONETARY AND FISCAL POLICIES THE IS-LM FRAMEWORK The economic environment that guided monetary policy before 1986 was characterized by the growing importance of the oil sector, the expanding role of the public sector in the economy and over dependence of the external sector. Hicks (1937) combined the classical and the Keynesian analyses to derive the IS-LM schedules.In a simple term the IS-LM framework refers to the locus of all pairs of income and interest rates for which both the expenditure and monetary sectors are simultaneously in equilibrium. The IS-LM framework lays emphasis on the interaction between the output or expenditure market represented by the IS and money market represented by the LM.
In this framework, spending interest rates and income are jointly determined by the equilibrium in both markets. Income Interest rate Fiscal PolicyMonetary Policy (LM) Source: B. O. Iganiga (macro economics concepts) Figure 2: The Structure of the IS-LMIn the framework, higher income raises money demand and thus link interest rate. Higher interest rate lower spending and thus income, thus the only factor that make the economy to move round is income and interest rate. However, simultaneous equilibrium in the expenditure market and money market exist at only one output level and one interest rate i. e.
ye and re. At that point planned savings plus government expenditure and the stock of money in existence is equal to the stock of money demanded. The interest rate (r0) and income level (YO) represent the only point at which the two equilibria are satisfied simultaneously.Other interest rates and output levels represent disequilibrium in one or both markets. r0 r1 Source: B. O. Iganiga (Macro economics concepts, theories and application Figure 3 Equilibrium at IS-LM Intersection In figure 3, at interest r1 there is equilibrium in the money market at output Y1 but in the expenditure market at output Y2.
Simultaneous equilibrium only exist only at point E0 with interest rate of (r0) and output of (Ye) summarily, figure 3 shows the relationship between money supply, government expenditure and interest rate.In order to maintain price stability and a wealthy balance of payment position, monetary management depend on the use of direct monetary instrument such as credit ceiling, selective credit controls, administered interest, exchange rate as well as the prescription of cash reserve requirement and special deposits. The use of market based instrument was not feasible due to the under¬developed nature of the financial market and the deliberate restraint on interest rates. The expenditure market (Is) illustrating the effect of interest rate alone in shifting the aggregate demand schedule.The position of the IS curve depends on the marginal efficacy of investment (MEI) curve. Shift in either or both will cause a shift is IS curve. Therefore example could be a shift in MEI due to technical progress.
Net investment will increase at all level of interest rate. Changes in government expenditure or taxation could bring about a change in this schedule. 3. 3MATHEMATICAL AND GRAPHICAL DERIVATION OF IS-LM SCHEDULE Mathematical Derivation For Is Curve Y= C+ I —————————————— (1) C= Co + CY————————————— (2) I= I0-Ir —————————————— (3)Y= Co + CY+ Io-Ir ——————————- (4) (Y-CY)= Co + Io-Ir —————————— (5) Y (1-C) = Co+ Io-Ir—————————— (6) Co + Io-Ir Y= 1-C —————————– (7) -IS Curve Income is negatively related to interest rate. r I S 0Y Source: I. A. O.
BAKARE (Fundamentals and Practice of Macroeconomics) (LM) Figure 4: IS CURVE When government spending and taxes are introduced, the following relation holds. Y= C0 +C(Y –T + R) + I0 + I(Y, r) + Go—————- (1) Where T= Taxes and Go = Autonomous government spending The slope of the IS curve is given as dr = 1-cy (1-Ty) -1y