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CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Views about the important of money in the working of the economy vary greatly.  In particular, the means by which money affects income and output and the extent to which changes in money supply (that is money stock ) affect the economy are two issues that have given Nise to a major debate between two group of economists distinguished by their adherence to two conflicting bodies of economic theory called Keynesians and Monetarism.

The debate has been long and complicated and has progressed through several stages over the years.  This debate is important implications for the effectiveness of monetary policy and the importance of monetary policy relative to fiscal policy, in affecting income, output, employment and the rate of inflation.

The relationship between the stock of money and the level of income and output is fundamental to the monetarism and Keynesians debate.

STATEMENT OF PROBLEM

There have been a thousand and one views on the relationship between money supply and certain macroeconomic variables such as national income, price, and levels.

The controversy on the on the rule of money vis-à-vis national income and price level has been going on for quite a long time before the great depression of 1930s, economists believed that increases in the quantity of money would lead to increases in the price level (inflation).

However, during he great depression group of economists emerged. They held that the important factor caused income and employment to fluctuate is investment.

Thos group of economists believed hat money is not an important determinant of the level of economic activity while a separate group with a contrary view believed that money is an important determinant of level of economic activity. They also believed that once there is unemployment in the economy, increase in money supply. Leads to increases in the level of income. This group of economist supported their assertion with a lot of empirical evidence, base on the above analysis, a lot of question arose.

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