INTRODUCTION OBJECTIVES METHODOLOGY HYPTHESIS LITERATURE REVIEW RESULTS AND DISCUSSION CONCLUSION RECOMMENDATION

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Acknowledgment I feel a great pleasure to express my profound sense of gratitude to Assistant Professor Shivachandra Dhakal, Department of Agri-economics, Institute of Agriculture and Animal Science, Rampur for providing such analytical task to study and learn dealt with various macroeconomic variables along with proper guidelines and suggestions throughout the study. I would like to express heart-felt respect and gratitude to the faculty members of the department; Associate Professor J.P. Dutta, Assistant Professor Dinesh Dhakal and Assistant Professor Rishiram Kattel for their valuable support and cooperation throughout the study. I like to extend my special thanks and appreciation to my PG classmates Navin Bhandari, Pradip Sharma, Bibek Acharya, Binod Kunwar, Namdev Upadhyaya, Shailendra Dhakal, Sanjeev Subedi, Shova Sharma, Deepa Devkota, Rachana Dev, Sabita Dhakal and Niraj Prasad Koirala for their helpful hands and cooperation to collect, analyse and interpret the undertaken study. Last but not least, Im grateful to my family who encouraging me in my carrier development during the entire study period.

Namdev Upadhyay

Introduction Monetary supply is one of the fundamental issues that need to be tackled to ensure sustainable growth in a country. It has always been a problem for the less developed economies. In Nepals anticipation to become a middle income economy, it requires a prudent and efficient monetary policy to achieve this aim. Also most of the activities in the economy are propelled by cash or physical money. This puts a lot of pressure on the Central Bank and the monetary authority ys at all times in managing the economy (Rasche et al,1987).The quantity theory of money states that, there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services (Friedman, 1956). This indicates that an activity of the monetary system in Nepal has a direct relationship with the above variables as the quantum of Money Supplied in the system will be the =cause and the effect will be inflation rate but are all macroeconomic indicators employed by the central bank in its quest to contract or expand the economy (Friedman, 1992).The bulk of Money supply consists of deposits that the public holds at financial institutions. Money Supply can be categorized into M1, M2, M2+ and the M3 (BoG Statistical Bulletins, 2002). 1 Where M1 measures the most liquid forms of money; it is limited to the actual currency in the hands of the general public like currency coins and notes. This includes cheque able accounts like cheques, and other deposits against which cheques can be written for and cleared. M2 measures travellers cheques of non-bank issuers, demand deposits, Other Checkable Deposits (OCDs) also known as demand deposits and those currencys that consist of M1.Economists use the M2 in quantifying the quantum of money in circulation within an economy and their desire to explain the conditions of the monetary economy. M2+, also measures all currencies (M1 and M2) in circulation, demand deposits, quasi-money and foreign currency deposits at the banks (BoG Statistical Bulletins, 2004). M3 includes the money supply of M2 and M1 large t ime deposits, institutional money market funds, short-term repurchase agreements, along with other larger liquid assets. It is the broadest portion of money supply (Investopedia Dictionary, 2011). The money supply is important to economists as they try to understand how policies will affect interest rates and growth. For analyzing the correlation between the variables following terms needs to be defined. a) Inflation Inflation is the second most important economic problem after unemployment. It is defined as the persistent rise in price level over time period. Here, price level refers to general or aggregate price but not a price of a single commodity. It is measured in percentage.

b) Consumption It is a part of total income which is expended for current purpose. Consumption depicts the expenditure at different levels of income. The more the change in income, the more will be the change in the consumption expenditure. Therefore, consumption is the function of income. It is expressed in million rupees.

c) Import Import refers to good and services brought into one country from another country. In other words, imports are goods and services produced by the foreign sector and purchased by the domestic economy. The higher the value of imports entering the country, compared to the value of exports, the more negative the countrys balance of trade becomes. It is expressed in million rupees. d) Per capita income Per capita income, also known as income per person, is the mean income of the people in an economy. It is calculated by taking a measure of all sources of income in the aggregate and dividing it by the total population. Per capita income is often used as average income, a measure of the wealth of the population of a nation, particularly in comparison to other nations. Per capita income is often used to measure a country's standard of living. It is expressed in million rupees.

e) External debt External debt (foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. For example: International Monetary Fund (IMF) and World Bank. It is expressed in million rupees. It is expressed in million rupees.

f)

Narrow money (M1)

It is one of the measures of money supply which includes cash in hand of public, demand deposits in commercial banks and co-operatives and other deposits in central bank. It is expressed in million rupees.

g) Broad money One measure of the money supply that includes M1, plus savings and small time deposits, overnight repos at commercial banks, and non-institutional money market accounts. This is a key economic indicator used to forecast inflation, since it is not as narrow as M1 and still relatively easy to track. All the components of M2 are very liquid, and the non-cash components can be converted into cash very easily. It is expressed in million rupees. h) Tax revenue Tax revenue is the income that is gained by governments through taxation. It is expressed in million rupees.

i) Investment Investment is putting money into something with the expectation of gain, usually over a longer term or it can be defined as net change in stock of capital in an economy in a given year. Investment is said to occur when income, employment and price level changes with the change in stock of capital. It is expressed in million rupees.

j) Bank rate Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances to a commercial bank. It is measured in percentage. k) Cash reserve ratio( CRR) It is the minimum amount of the total deposit which is to be kept in the form of cash by financial institution. The aim of CRR is to check supply of money at the time of inflation. It also works in reverse direction. It is measured in percentage. l) Labor force It is defined as the source of trained people from which workers can be hired or the total number of people employed or seeking employment in a country or region called work force. It is expressed in persons.

m) GDP growth rate The GDP growth rate is the most important indicator of economic health. When the economy is expanding, the GDP growth rate is positive. If it's growing, so will business, jobs and personal income. The GDP growth rate measures how fast the economy is growing. It is measured in percentage. n) GDP The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. In other words it can be defined as national income excluding the net factor income. It is expressed in million rupees.

o) Saving Saving is that part of income which is the excess (remainder) after consumption. In general the higher the income, the higher is the saving. It is expressed in million rupees.

p) Investment multiplier The term investment multiplier refers to the concept that any increase in public or private investment spending has a more than proportionate positive impact on aggregate income and the general economy. The multiplier attempts to quantify the additional effects of a policy beyond those that are immediately measurable.

q) Employment It refers to the state of being employed. It is measured in percentage.

r) Unemployment Unemployment is defined as a situation where someone of working age is not able to get a job but would like to be in full time employment. Unemployment is expressed as a percentage of the total available work force. The level of unemployment varies with economic conditions and other circumstances. The most frequently cited measure of unemployment is the unemployment rate. This is the number of unemployed persons divided by the number of people in the labor force. It is measured in percentage.

s) Disposable income It is defined as the national income remained after deduction of tax and addition of subsidy. Thus it refers to that part of income which will be available to the people for their expenditure. It is expressed in million rupees.

t) Correlation It is measure of the strength of linear association between two variables. Correlation will always between -1.0 and +1.0. If the correlation is positive, we have a positive relationship. If it is negative, the relationship is negative.

u) Regression In regression analysis independent variable is also known as regressor or predictor or explanatory variable while dependent variable is also known as regressed or explained variable.

Objectives To be acquainted with the different macroeconomic variables To collect the data on different macroeconomic variables To establish the macroeconomic relationship in between and among the macroeconomic variables Literature review Relationship between the money supply and the inflation According to Anyanwu (1993), money supply is the total amount of money (e.g. currencyand demand deposits) in circulation in a country at any given time. Adeyeye and Fakiyesi(1980) found that there exist some significant relationship between growth in bank credit, growth of money supply and growth of government expenditure and inflation rate while an unclear relationship exists between government revenue and inflation. According to Nyong (2001), inflation varies ceteris paribus positively in relation to the growth in money supply and negatively with respect to growth in real income or output. In support of this argument, Ogun and Adenikinju (1995) found that the period of oil boom in Nigeria characterized by rapid monetary growth was consistent with the periods when the country experienced double-digit inflation. 1980 in Nigeria. The CPI can be split into two main parts; the Non-Food inflation rates and Food and beverage inflation rates (BoG Statistical Bulletins,2004).The Non-Food CPI includes recreation, entertainment, housing & utilities sub-sector (rents,water bills, electricity bills and telecommunication bills), education..The quantity theory of money states that, there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services (Friedman, 1956). Keynesian view Liquidity Trap In a recession, there may be much spare capacity in the economy. Therefore, an increase in the money supply, merely helps to get unemployed resources used in the general economy. Therefore, in the case of a recession, increased money supply is unlikely to cause inflation. In a liquidity trap, interest rates fall to zero but this doesnt prevent people saving. In this situation there is a fall in the velocity of circulation and this can cause deflation. In this situation, increasing the money supply will not necessarily cause inflation.

Monetary view is based on the quantity theory of money by Irving Fisher (1948) depicts that changes in money supply growth are followed by equal and proportionate changes in the inflation rate. Thus, the monetarists posit that contractionary monetary policy will be an effective anti-inflationary instrument. Studies on the impact of inflation on economic growth and the direction of causality between money supply growth and inflation are repleted in the literature. Many economists believe in the monetarist view of inflation. Increase in money supply shifts the aggregate demand curve to the right and if the economy is operating at full capacity, the upward shift in aggregate demand curve will cause price level to rise. The increase in money supply continues shifting the aggregate demand curve to the right; if aggregate supply does not increase sufficiently to match the increase in aggregate demand, price level will continue rises

Relation between money supply and Consumption expenditure (in million) There is positive relationship between the government expenditure and money supply (Garrison, 2007). Budgetary deficit occurs as a result of excessive Government expenditure. This can be clarified by income deficit and un-realized funds under the auxiliary financial plan (BoG Statistical Bulletins, 2004). This is one of the key areas used to expand, introduce or inject funds into the economy as part of its fiscal policies. Relation between Supply of money and Gross domestic product, there was a a high correlation between money supply growth and overall economic growth, as measured by gross domestic product (GDP). Over time, that close relationship started to break down due to changes in banking accounts, the proliferation of financing companies, and more widespread investment among consumers (stock and bond investments are not captured in M1 and M2 aggregates). By Ryan Barnes, released by federal Reserve board http://www.federalreserve.gov/releases/h6/ Aggregate demand can be defined as AD=Yd = C + I + G + NX in real or inflationcorrected terms at any given aggregate average price level (such as the GDPdeflator), P. Using this formula where C is consumption and I is investment, it is clear that the action by the Fed will impact aggregate demand. The expansion of the money supply lowers interest rates and increases investment andconsumption, which are components of aggregated demand. Georgios Karras University of Illinois at Chicago - Department of Economics Relationship between Money supply and investment An increase in the money supply causes a drop in interest rates and lower exchange value of the dollar, stimulating various types of spending. Investment projects originally believed to be only

marginally profitable would then become more attractive with lower financing costs from the lower interest rates. The lower interest rate means that consumers would shift from saving their money to spending their it given that lower interest rates reduce the return to savings. Also, lower consumer loan rates elicit greater demand for consumers goods, especially big-ticket items that require financing, such as motor vehicles. Lower mortgage rates make housing more affordable, leading an increase in home purchases. In addition, exports may rise given that a lower valued dollar can further increase aggregate demand (Figure 0). Aggregate demand can be defined as AD=Yd = C + I + G + NX in real or inflation-corrected terms at any given aggregate average price level (such as the GDPdeflator), P. Using this formula where C is consumption and I is investment, it is clear that the action by the Fed will impact aggregate demand. The expansion of the money supply lowers interest rates and increases investment andconsumption, which are components of aggregated demand. Thus, the aggregatedemand curve will shift to the right. Conversely, if the Federal Reserve decreases the money supply interest rates would increases in the market for money, causing less investment and consumption, finally shifting the aggregate demand curve to the left. (Source https://www.boundless.com/) Relationship between Money supply and import If the money supply increases faster than GDP for an extended period of time, especially if the economy is already at full employment, then you would expect to get both inflation and a weaker currency. A weaker currency would tend to decrease imports and increase exports. But, we are now in a period of high unemployment, and what the Fed has been trying to do is increase the money supply so as to boost the economy. If the economy does recover faster as a result of the increased money supply, then people will buy more of everything, including more imports, just because the economy as a whole is better off. Just what happens with exports depends on the exchange rate and what is happening in other countries. Source http://answers.yahoo.com/question/index?qid=20110510104658AAPt8xb (note other relationships are difficult to get in internet.)

Methodology This research adopted an empirical research method, using a time series quantitative approach. The researcher will rely mainly on secondary source of data from the internet browsing and searching the related literature on books. On the basis of the correlation and regression the relationship of the money supply with different economic variable will be establish. The established relationship correlated to the macroeconomic principles.The analysis will be proceeds through the SPSS, STATA and excel. Hypothesis The premises for the data analysis are that; Ho: There is no mathematical relationship is present between the money supply and different macroeconomic variables. H1: There exist mathematical relationship is present between the money supply and different macroeconomic variables. The researcher will reject Ho: if there is a relationship among the variable. The researcher will fail to reject Ho: if there is no relationship among the variable. The hypothesis test is conducted at 95% confidence interval that the findings shall be the true result on the ground.

Results and discussion The pairwise correlation between money supply and all collected variable are analyzed and we get following economic variable significant at 5% level of significance like Inflation (%) Consumption expenditure (in million),Import (In million),Per-capita Income(in million), External Debt(in million), Money Supply (in million),Narrow money(In millions), Broad money(in millions), Tax Revenue(million), Investment(in million),bank Rate, labor force(person),GDP(million), Saving(million), employment (%), Unemployment (%),Disposable Income(in million).For the economic model of the different economic variable (see appendices.)

Data matrix collected

Consumptio n expenditure (in million) 415844.00 450090.00 473685.00 521301.00 595327.00 656374.00 735470.00 895042.00 1085290.00 1096653.00 Tax Revenue(mil lion) 42587.00 48173.00 54104.80 57427.00 71126.70 Import (In million) 534279.0 0 575376.0 0 607981.0 0 666372.0 0 788223.0 0 795613.0 0 1220320. 00 1572209. 00 1342503. 00 775460.0 0 Investmen t(in million) 853400.0 0 921400.0 0 1211300. 00 1311900. 00 1576600. 00 PercapitaInc ome (in million) 0.02 0.02 0.02 0.03 0.03 0.03 0.04 0.05 0.05 0.06 External Debt (in million) 1062.55 14471.77 14974.80 15412.26 16018.56 16562.48 17213.15 18091.48 19007.23 19932.57

Year 2002/ 03 2003/ 04 2004/ 05 2005/ 06 2006/ 07 2007/ 08 2008/ 09 2009/ 10 2010/ 11 2011/ 12

Inflation (%) 2.90 4.74 3.96 4.54 7.96 6.20 6.69 12.63 9.56 9.60 Broadmone y(in millions) 223988.30 245911.20 277310.10 300440.00 346824.10

MoneySu pply (in million) 301144.50 329665.30 371283.80 400645.80 459884.90 522406.20 649721.00 826980.60 938118.10 1081328.7 0 laborforce (person) 13316705. 90 13316815. 90 13668270. 29 14015065. 86 14389637. 83

Narrowmone y(In millions) 77156.20 83754.10 93973.70 100205.80 113060.80 126888.00 154343.90 196459.40 218519.00 228058.60 GDPgrowthr ate 3.80 3.95 4.68 3.12 3.72

Year 2002/ 03 2003/ 04 2004/ 05 2005/ 06 2006/ 07

bankRate 5.50 5.50 5.50 5.50 6.30

CRR 6.00 6.00 6.00 5.00 5.00

2007/ 08 2008/ 09 2009/ 10 2010/ 11 2011/ 12

395518.20 495377.10 630521.20 719599.10 853270.10

85155.50 117051.90 156294.90 181255.00 209203.00

1731000. 00 2198800. 00 2279110. 00 3428400. 00 5072400. 00

6.30 6.30 6.50 6.50 7.00

5.00 5.00 5.50 5.50 5.50

14757356. 85 15151691. 83 15591278. 24 16039658. 30 16495722. 47

3.42 6.10 4.53 4.82 3.88

Conclusion The main purpose of the research paper was to find out the relationship existing between the macro-economic variables. From the data analysis we found the positive and linear relationship between money supply and the other entire economic variable except the money supply and unemployment where there is negative relationship. The study also adopted the secondary data source using the SPSS package to critically analyze the variables quantitatively. The literature reviewed theories by Keynesian on The General Theory of Employment, Interest, and Money and Friedmans argument against him in The Quantity theory of money to see which is the case of Nepal over the 10 years period is found to be reliable. Through this study the policy makers become aware of the fact of Nepalese economy and know how to use the money supply policy are pillar to guide the other economic variables. In context of Nepal the Keynesian theory holds good. Recommendation A cash less economy will help in reducing the money supply growth rate of the country as it is still high and will suggest that government should assist the central bank vigorously to fully implement the common payment platform system for all banks and businesses to enable a little or cashless free economy. Furthermore, the economy requires increasing its productivity in food production, as most resources of Nepal are channeled towards the purchasing of food items. Since this is one of the major holdups as most produce go waste in the farm lands due to the absence of storage facilities, marketing boards as well as low farm yields makes the output from the Agri-sector to remain low but employs most of the citizens. This then results into the rising inflation rates of the country as demand exceeds supply in the economy. Resource mobilization is one of the major pit falls for the government as it ends up borrowing always to supplement its budget which is a treat to our debt stability.

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