THE IMPACT OF GOVERNMENT EXPENDITURE, MONEY SUPPLY AND INFLATION ON ECONOMIC GROWTH OF NIGERIA
Background of the Study
According to the fundamental concept of economics, inflation, money supply and government expenditure have a close relationship and impact to economic growth whereas, inflation has been caused primarily by an excess of money supply and increase of credit (Kweka and Morrissey, 2000). Monetary and fiscal policies initiated usually keeps rising inflation. These increases are dominant because when people are allowed to offer more money for goods or the supply of goods cannot be balanced with supply of money automatically raises the price of goods.
The price of goods rises, not only because the goods are scarce than before, but because money is more abundant and less valued (Al-Fawwaz, 2015). Al-Fawwaz says that in the early years, various governments applied the tradition method of clipping and debasing the coinage by grinding more money on a printing press. Today, the approach is slightly different and acts in the indirect way. Currently, governments sell bonds to banks; in turn banks create deposit on books, which can be drawn by the state. On the other hand, some economists believe that a low and stable inflation rate of 3 percent has a small cost in the economy (Mankiw, 2008).
The need to understand the cause and cure of inflation usually lead researchers to different opinions about the appropriate measures to be taken to stabilize inflation. Those advocating on monetary terms have been advising the government to stabilize the budget deficit and restrain credit to public enterprises. Although this approach is viable, but the economic stability cannot exist in the market mechanisms with the dramatic change of inflation. The simple and reliable solution is to control the government expenditures, which causes a deficit in the process of economic development.
According to Mankiw, (2008) when the supply of money is very high, the inflation has effects on the following; the value of the monetary unit depreciates very quickly, raises everybody’s living costs, wipes out the value of the past savings, discourages the future savings and redistribute wealth and income wantonly, in return reduces the economic growth. Although the economic growth of Tanzania has many problems but this study focuses on examining the effects of government expenditure, money supply and inflation in the country.
Statement of the Problem
The relationship between government expenditure, money supply, inflation and growth of economy is especially important for developing countries, most of which have experienced increasing levels of public expenditure and inflation over time (Kweka and Morrissey, 2000). This has tended to be associated with rising fiscal deficits and inflation, suggesting their limited ability to raise sufficient revenue to finance higher levels of expenditure. Rising deficits and money supply increases inflation and tend to have had an adverse effect on growth in country (Mbongo et al, 2014). This study is concerned with the composition of expenditures by the government on final consumption, broad money supply and inflation in percentages outsourced from UNCTAD data base.
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