In: Economics
(a) examine critically the effectiveness of monetary policy instruments since 1999 in Nigeria .(b) The demand for money as expressed by the Keynesian Economists is M^d = f(Y) +f(r). give a detailed exposition of the theory and account for the contribution of Y and r in the relationship
a. The main Aim of central government was to reduce the excess liquidity in the banking system to maintain the economy. By reducing the liquidity there was a direct impact on inflation, financial sector, balance of payment and exchange rate system etc.By the end of 1999 there was mix of broad and narrow money in the economy and there of increase in GPD by 2.7 %. However in the starting of 2000 again there was excess liquidity that lead to increase of broad money in the market. with this the Central Bank of Nigeria started a programme called monetary policy frame work with the objective to achieve to exchange rate stability by minimizing the time inconsistent.Hence again there was mixed economy of broad and narrow money.
The central bank of Nigeria keep adopting monetary policies for stability in growth of economy and in the year 2007 finally the results were somewhere achieved and there was single digit inflation sustained. by adoption of Monetary policy Rate there was drastic change in economy as MPR use to review thrice during the year. there were different Committee formed like liquidity assessment group, MPR committee,Liquidity position etc.
we can conclude that Nigeria Economy is always under pressure to achieve stability as in in years the target was achived however in the year 2016 , 2017 again there were crises.
Hence the broad outlook for the domestic economy in 2019 portends a positive outlook for the domestic economy. Output growth is expected to be driven by fiscal stimulus from increase in oil and non-oil receipts to support the Federal Government’s Economic Recovery and Growth Plan.
money hold for transaction and safeguarding is a function of level of income i.e. with inversely varies with the interest rates and directly with level of income.
Changes in the market interest rates helps to determine speculative demand or money. it is decreasing function of the rate of interest.
the equation clearly shows relation between demand for money in equation with level of income and demand for speculative money
b. Keynes theory was based on role of money i.e. the increase in level of money can bring in increase in the level of output. For eg. when the quantity of money is increased the interest rate falls which will increase the volume of investment. which in turn will increase the output i.e. income and employment. however there was his notion that increase in quantity of money will only increase when full level of employment is reached.
now in the given equation M^d = f(Y) +f(r).
M^d : total demand of money
f(Y) : level of income
f(r) : speculative demand for money
so, Thus the total demand for money is a function of both income and the interest rate. The higher the rate of interest, the lower the speculative demand for money, and vice-versa .