Group members :

• Mazahir joiya
• Huzaifa Butt
• Wahab Ali
• Talish Bashir
• Hafiz Ameer Hamza Hashmi
Impact of Money supply on economic
growth :
Introduction :
• Economic growth is an important macroeconomic objective for any country.
Monetary policy has direct relation with economic growth.
Moneysupply as the arrangements which are planned to control supply of money
in a country. Inmany countries the basic aims of the monetary policy are to
stabilize prices, keep the balanceof payment equal, promote the employment
and increase in economic development
Money supply :
• Money supply is the total amount of money available in an economy at a
particular time.
• The money supply can include cash, coins and balances held in checking and
savings accounts. Economists analyze the money supply and develop policies
revolving around it through controlling interest rates and increasing or decreasing
the amount of money flowing in the economy.
Role of State bank :
• Since the foundation of State Bank of Pakistan (SBP) in 1948 it has playing its role
to stabilize economic growth through monetary policy. The main purpose of
monetary policy in Pakistan as described in the State Bank of Pakistan Act 1956 is
to attain steady growth and control on inflation.
Effects of money supply on inflation :
• The interest rate increase when there is tight monetary policy which leads to
reducing inflation and the easing of monetary policy enhance the level of
economic activities.
• The relation between money supply and inflation, sometimes it is directly
proportional to each other if the real outputs is increasing with the increase of
money supply inflation is also increases. But if the money supply increases at the
same rate as real outputs then prices will stay the same.
Quantity Theory :
• The theory that describe the relation between prices and money supply is called
quantity theory of money. The quantity theory purposes the exchange value of
money is determined like any other good with supply and demand. The basic
equation for the quantity theory was developed by American economist Irving
Fisher is expressed as
• Total money x velocity of money = average price level x volume of economic
transaction
In the lights of quantity theory :
• Some variants of the quantity theory propose that inflation and deflation occur
proportionately to increase or decreases in the supply of money. Empirical
evidence has not demonstrated this and most economists do not hold this view.
• A more nuanced version of the quantity theory adds two caveats because new
money has to actually circulate in the economy to cause inflation and inflation is
relative never absolute.
• But Keynesian and other economists reject orthodox interpretations
of the quantity theory. Their definitions of inflation focus more on
actual price increases with or without money supply consideration.
Growth and money supply phenomenon :
• Before 2005, monetary policy was mainly supporting the economic growth due to
lowinflation level but from 2005 the inflation is going to rise. The monetary policy
after 2005concentrated on limiting the inflation rate
(State Bank of Pakistan, 2006)
• High rate of inflation not only influence economic performance but it also
adversely affectthe real economic growth. There is relationship between inflation
and economic growth.
• According to Smyth (1992) 0.1% increase in inflation in USA it reduced the annual
growth by 0.223%.
• If the rate of inflation is high then it has significant negative effect on economic
growth but at low rate of inflation the relationship is negative but not significant.
Inflation not only influences economic growth negatively but it also increases
economic uncertainty in the economy.
• Due to the harmful impacts of inflation most of the world‟s Central
Banks have considered to stabilize the prices and make it the basic
function of monetary policy
By increasing money supply causing inflation :
• In Pakistan when we print more money like state bank of Pakistan buy securities
of Pakistan in open market and we take more and more loan in which money
supply increase with the increase of inflation. Here is a graph which shows that
how inflation rises with the increase of money supply according to IMF :
Increasing the money supply faster than the growth in real output will cause
inflation. The reason is that there is more money chasing the same number of
goods. Therefore the increase in money supply causes firms to put up prices.
If the money supply increases at the same rate as real out, then prices will stay
the same
Year Number of widgets Money supply Average price Inflation rate

2000 20,000 10,000 0.5

2001 24,000 12,000 0.5 0%

2002 28,000 14,000 0.5 0%

2003 32,000 20,000 0.625 25%
2004 36,000 30,000 0.833 33%
Effects of money supply on economic growth :
• The credit to private sector the variable of financial depth, real exchange rate are
found significantly influencing GDP in Pakistan. The analyses of monetary policy
in Pakistan show that actual growth remained higher than target rate of money
growth set by the SBP. Moreover money expansion has an inflationary impact on
the economy of Pakistan
Views by different researchers :
• Hussain and Haque (2017), researched about the empirical analysis of the
relationship between money supply and per capita GDP growth rate for
Bangladesh, using vector error correction model (VECM) model. They ascertain
that the money supply has significant role on the growth rate. The same results
are proven by other researchers.
• Like Chaitipa , Choke thaworna , Chaiboon srib and Khoun khalaxc (2015),
investigated the money supply influence on economic growth for Authorized
Economic Operators (AEO) open region in the period 1995-2013, using
Autoregressive Distribution Lag (ARDL) model. They found money supply is
associated with economic growth