CONCEPTOFSAVI

NGS,
I
NVESTMENTANDCONSUMPTI
ON

a.SAVI NGS:Thi sref

erstodi sposableincomenotspenton
consumpt ion(goodsandser vices).Savi
ngs=Y-C
b.INVESTMENT: Thi
sistheexpendi t
ureonphysicalasset
swhichar
enot
forimmedi ateconsumpt i
onbutf orproduct
ionofconsumerandcapit
al
goods.
c.CONSUMPTI ON:Thisi
st heuseofgoodsandser vi
cestosat
isf
yhuman
want s.I
tisalsoallexpenditureongoodsandser v i
ceswhicharemeantf
or
currentuseindi r
ectsati
sfactionofwant s.

AVERAGEPROPENSI
TYSAVEANDCONSUME

1.Averagepropensi
tytoSave(APS)
:Thi
sthepropor
tionofone’
sincome
thati
ssaved.APS=S/ Y
2.Averagepropensi
tytoconsume(APC)
:Thisi
sthepr opor
ti
onofone’
s
i
ncomespentonconsumpt i
onofgoodsandservi
ces.APC=C/ Y

Exampl
e:I
fanindi
vi
dualear
nsanannuali
ncomeof$120,000andspends
$80,
000onconsumpti
onofgoodsandser
vices.Cal
cul
atehi
sAPCand
APS.

Sol
u:
Y=$120,
000
C=$80,
000
APC=$80,000/
120,
000=2/
3=0.
7

S=Y-C
$120,
000-$80,000=$40,000
APC=S/ Y=$40,000/$120,
000=0.3
NOTE: APC+APS=1
Theref
ore,0.
7+0.3=1

3.MARGINALPROPENSI TYCONSUME:Thi
sistherati
oofachangein
consumpti
ontoachangeini
ncome.MPC=Changei n
consumpti
on/
changeini
ncome.
4.MARGINALPROPENSITYTOSAVE(MPS):Thisi
srati
oofchangein
savi
ngstoachangei
nincome.MPS=Changeinsavi
ngs/changei
nincome
NOTE:
MPC+MPS=1

Example:
Ift
hemonthl
yincomeofani ndivi
duali
sincr
easedfr
om
$10,000to$12,
000andhi
slevelofconsumptionincr
easedby$500.
Calculat
ehi
sMPCandMPS.

Sol
u:
MPC=Changei
nconsumpt
ion/
Changei
nincome=500/
2000=0.
3
MPS=1-MPC=1-
0.3=0.
7

MULTI PLIER
Thistherati
oofchangei nnationali
ncomet oanyoft hecomponentsof
aggregatedemandort otal
ex pendit
uresuchaspr i
vateconsumption,
pri
vateinvest
ment ,gov
ernmentexpendi tur
e, export
sandimports.The
multi
pli
erincreasesordecreasesnationali
ncomeataf asterr
atethanthe
changeinaggr egat
eexpenditure.Themul t
iplieri
sdenotedbythesy mbol
(K)

K=1/ 1-MPC
Exampl e:I
ftheMPCI S0.80,whatisthemulti
pier?
Solu: K=1/1-MPC=1/ 1-0.
80=1/0.
20=5
Exampl e2:Ifpr
ivateconsumpt i
onexpendit
ure( C)changesf
rom #250M t
o
#250whent heMPCwas0. 75,
deter
mi net
hechangesi nnati
onal
income
l
evel.
∆C/ ∆Y=1/ 1-MPC
Theref ore,
∆Y=1/ 1-MPC×∆C
=1/1-0.75×(250M- 200)=1/ 0.
25×50=200M

MONEYMARKET
Themoneymar
ketisaf
inanci
almar
ketf
orbor
rowi
ngandl
endi
ngofshor
t
ter
mloansf
ori
nvest
ment.

MONEYMARKETINSTRUMENTS
Thei
nst
rument
susedi
nthemoneymar
ketar
e:
a.Bi
llofexchange
b.Treasur
ybill
s
c.Callmoney

MONEYMARKETAGENCI ES
Themoneymar ketagenci
esar
e:
a.Cent
ralBank
b.Commer ci
albanks
c.Di
scounthouses
d.Fi
nancehouses
e.I
nsurancecompanies

FUNCTI ONSOFTHEMONEYMARKET
I
.I thelpstomaintainmonet aryequil
ibri
um intheeconomy
i
i.Itpromoteseconomi cgrowth
I
ii.
Itprovi
deshelpt otradeandi ndust
ry
i
v .
Itencouragescapitalformation
v.Ithelpsi
nt hei
mpl ement ati
onsofmonet ar
ypolicy
vi.
Itprovi
desnon-infl
ationarysourcesoffinancetothegov er
nmentt
hrough
theissueoft r
easurybill
sinor dertorai
seshor tt
erml oans
CAPI
TALMARKET:Thi
sisaf i
nanci
almarketforborr
owingandl
endi
ngof
medi
um andl
ongt
ermloans.Thecapi
tal
mar ketisdi
videdi
ntot
wonamel
y:

a.Pri
marymarket
:deal
sinbuyi
ngandsel
li
ngofnewsecur
it
ies
b.Secondar
ymarket
:deal
sinbuyi
ngandsell
i
ngofol
dorexist
ing
securi
ti
es

CAPI
TALMARKETI
NSTRUMENTS

i
.Shares
i
i
.Bonds
i
i
i.Tr
easur
ycerti
fi
cat
e
i
v.Debent
ures

CAPI
TALMARKETI
NSTI
TUTI
ONS
Thei nst i
tut
ionsinvol
vedint
hecapi
tal
mar
ketar
e:
I
.Issui nghouses
i
i.Insur ancecompani es
i
ii
.Dev elopmentbanks
i
v.Inv estmentt r
ust
v.Mor tgagebanks
vi
.Financecor porati
ons
vi
i.Sav ingsbanks
vi
ii
.St ockexchange

FUNCTI
ONSOFCAPI
TALMARKET

a.I
tmobili
sessavingsforinv
est ment
b.I
tprovi
deslongtermloansf ordevelopmentpur
pose
c.I
tencouragescapit
alformation
d.I
tpromoteseconomi cgrowth
e.I
tencouragesproperregul
ationoffund
f.I
tencour
agescont i
nuousavai l
abi
li
tyoffunds

STOCKEXCHANGEMARKET
Thi
sisanor gani
zedcapit
al mar
ketforbuyi
ngandsell
ingofsecuri
ti
essuch
asshares,
stock,debent
uresandgov er
nmentbonds.
Itisanon-pr
ofi
t
ori
ent
edor gani
zati
onthatismoreconcernedwi
tholdorexist
ingsecur
it
ies.

PRI
NCI
PALS DEALERSI
NTHESTOCKEXHANGEMARKET

A.THEBROKERS: Theyactasagentofindi
vidual
sorcompani eswhowi sh
tosellorbuysecurit
iesandchargethem acommi ssi
onknownas
Brokerage.
B.THEJOBBERS: arethemaindealerswhodeal sdi
rectl
ywiththebrokers
andnott hegeneralpubl
ic.
Theyusuall
yquotet wopri
ces;alowerpri
cef or
buyingandahi gherpri
ceforsel
li
ng.Thedif
ferencebetweenthesetwo
pri
cesisknownast heJobberturn
 FUNCTI ONSOFTHESTOCKEXCHANGEMARKET
I.
Itprov idesthemar ketf orbuyingandsellingoflongtermfi
nancial
secur i
ties.
i
i.Ithelpsi nr ai
singcapi t
alfordevelopment
Ii
i.Itprov i
desempl oy mentoppor tunit
iesfor
i
v .I
tencour agescapi talfor
mation
v.Ithelpsi nt heimpl ement ati
onsofmonet arypoli
cy
vi.I
tpr ov i
desnon- i
nf lati
onarysour cesoffinancetothegover
nment
throught heissueoft reasurybil
lsinordertoraiseshortt
ermloans

DEMANDFORMONEYANDMONEYSUPPLY
DEMANDFORMONEY: Thi
sisthedesi retohol
dmoneyincashorli
qui
d
for
mi nst
eadofinv
esti
ngit
.Iti
st heamountofmoneyani ndi
vi
duali
s
wil
li
ngandabletohol
datapar t
icularti
me.
Thedesiret
oholdmoneyincashaccor dingtoLor
d.M.Keynesi
sthe
motivebehi
ndthedemandformoney .

MOTI VES/ REASONSFORHOLDI NGMONEY

Thet hr eemot i
vesf orholdi
ngmoneyar e:
1.Tr ansact ionsmot i
ve:Thisist
hedesiretohol
dmoneyf
ordai
l
y
requirement ssuchasf ood,tr
ansport
.
Det ermi nantsofTr ansact i
onmot i
ve:
i
.Fami lysize
i
i.Gener alpricelevel
i
ii.Sizeofi ncome
i
v .Av ail
abilit
yofcr edit
v.Interv albetweenwagepay ment
vi.Rat eofi nter
est
vii
.Lifest yleorst atus

2.Precauti
onarymot i
ve:Thismoti
veisbasedont
heneedtohol
dmoney
meetunf or
eseencontingenci
esorunexpect
edpay
mentsuchasmedi
cal
expenses,acci
dent.
DeterminantofPrecauti
onarymoti
ve:
i
.Fami l
ysize
i
i
.Av ai
labi
li
tyofcredit
i
i
i.Si
zeofi ncome
i
v.Avail
abil
ityofsoci
alinsur
ance
v
.Inter
v al
bet weenwagepay ment
v
i.Rateofinterest
v
ii
.Perceptionofrisk

3.Speculati
veMot i
ve:Thisi
sthedesi
retohol
dmoneytot akeadv
ant
age
i
ninvestmentoppor t
unit
iesi
nsecuri
ti
esegSharesandbonds
Deter
minantofSpecul at
ivemoti
ve
i
.Degreeofav ersi
on
i
i.Rat
eofi nter
est.

MONEYSUPPLY
Thi
sref
erstothetotalvolumeofmoneyav ai
l
abl
eforuseinconnect
ion
wit
heconomicactiv
iti
esoft hecount
ry.Iti
ncl
udest
hetotalcur
rency
,
demanddepositandallformsofmonet arymedi
a.

FACTORSAFFECTI
NGTHESUPPLYOFMONEY

a.Cent r
albankr eserve:Ifthet
otalreservebaseoft hecentr
albanki shigh,
themoneysuppl ywi l
l bealsobehighandv i
ceversa.
b.Bankr ate:Thehighert hebankrate,thelowerthemoneysuppl yandv ice
versa
c.Liquidi
tyrati
o/Cashr ati
o:Thisi
st hepercentageofdepositscommer cial
banksar erequir
edt okeepwi t
hthem.I fthecashreserverati
oishigh,the
supplyofmoneywi l
lbel owandv i
cev ersa
d.Economi cSituation: I
naperiodofinflati
on,t
hecent r
albankwillreduce
themoneyi ncir
culation(suppl
yofmoney )andincreaseiti
naper i
odof
deflat
ion
VALUEOFMONEY
Thisisthepur chasingpowerofmoneyort heamountofgoodsand
servi
cesagi venmonet aryuni
tcanbuy.Thev alueofmoneyismeasur ed
usi
ngt hepr i
cei ndex.Thepri
ceindexmeasur eshowt heval
ueofmoney
changesov er
t i
meandi ti
sinv
ersel
yrelat
edt othepricel
evel
.Ani ndex
numberi sasingl enumberwhichmeasur eschangesi nt
hepr i
cesofgoods
andser v
icesov eraper i
odofti
me.Iti
sinverselyrel
atedt
oprice.
Pr
icei
ndex=Pr
icei
nthecur
renty
ear x100
Pr
icet
heprevi
ousorbasey
ear 1

Exampl
e:Assumingthepri
ceofBour
nvit
awas₦250i
n2012buti
ncr
eased
to₦300in2013,
calcul
atethepr
icei
ndex.

P.
I=300X100=120%
250

From t
heabov eexample,
thepri
cel evel
incr
easedfr
om 100to120whi ch
showst hepriceofbournvi
taby20%bet ween2012and2013.Wet herefor
e
concl
udet hatthevalueofmoneyf ell
ordecl
inedby20%
Note:Ar educti
onorrisei
nthevalueofmoneyi sdet
erminedbyanincrease
ordecreaseint hepr
iceofgoodsandser vi
ces.

FACTORSAFFECTINGOFTHEVALUEOFMONEY
a.Pri
cel
evel
b.Suppl
yofmoneyandit
sspeedorv
eloci
ty
c.Vol
umeofgoodsandserv
ices
d.I
nfl
ati
onanddefl
ati
on

QUANTI TYTHEORYOFMONEY
Theconceptofquant i
tytheoryofmoneybegani nthe16thcentur
y.
Itstatest hatthereisadi rectr
elat
ionshipbetweenthequant i
tyofmoneyi n
aneconomyandt helevelofpri
cesofgoodsandser vi
ces.
Accor dingt othet heory,i
ftheamountofmoneyi naneconomyi ncreases,
theconsumerpay stwiceasmuchf orthesameamountofgoodsand
services.Themar gi
nalvalueofmoneyf al
l
sasi tssuppl
yincreases.
Usingt heI rvi
ngFi sher’
sequation
MV=PT, where
M=moneysuppl y
V=vel ocit
y( t
henumberoft imesmoneychangeshands)
P=av eragepr icelevel
T=vol umeoft ransacti
onofgoodsandser vices.Thi
stheoryisbuiltonthe
equati
onofexchangewhi
chi
stheamountofXv
eloci
tyci
rcul
ati
on=t
otal
spendi
ng.

GRESHAM’
SLAW OFMONEY

SirThomasGr esham arguedthat“badmoneyhast hetendencytodri

veout
goodf r
om cir
culati
on”.
Accordingthi
m, therewasat endencyforholder
sofmoneywi thhi
gh
contentofval
uablemet alt
oeithertomeltthem down,
therebyincr
easi
ng
thequantit
yofbadmoneyi ncir
culati
on.

INFLATI
ONANDDEFLATI ON
I
NFLATI
ON: Thisi
stheper
sist
entorconti
nuousri
seinthegener
alpr
ice
l
evel
ofgoodsandservi
cesinaneconomyov eraper
iodofti
me.

TYPESOFI NFLATI ON
1.DemandPul linf l
at i
on: Thisoccur swhent hereisexcessdemandov er
supplyofav ail
abl egoodsandser vi
ceswhi chwillresult
si nanincreasein
pri
ce.
2.CostPushI nf l
at ion:Thi sisthet ypeofi nfl
ati
onwhi choccursduet o
i
ncreasei nt hecostofpr oduct ionorf actori nputswhi chleadstoan
i
ncreasei nt hepr icesofgoodsandser vices.
3.Creepi ngI nf l
at ion: Thisi sthet y
peofi nf l
ati
onwhi choccur sduet oa
sl
owbutst eadyr isei npricesofgoodsandser vices.
4.HyperI nflation: Thisoccur swhent hepr i
cesofgoodsandser vi
cesin
generalisper si stentandr apid.
5.Stag-inf l
at i
on: Thi sisthet ypeofi nf l
ationaccompani edbyhi ghlevelof
unempl oy ment .
6.Impor tedi nf lation: Thisoccur swhengoodsar eimpor tedfrom acountry
wit
hhi ghl evel ofi nf l
ation.
7.Reflation: Thi sr ef erstoi ncreasei nthegener alpriceleveldel
iberat
ely
causedbygov er nmentpol icy.

CAUSESOFI NFLATI ON
a.Excessiv
edefi
citfi
nanci
ngandr apidincreasei
ngovernmentexpendi
tur
e
b.Incr
easedbanklending:
Thisincreasesthesupplyofmoneyandleadsto
anincreaseinpr
ice
c.I
ncreaseinwagesandsal ar
ies
d.Poorstor
agef aci
li
ti
es
e.Wars
f.Hi
ghcostofpr oducti
on
g.Lowlevelproducti
on
h.Rapidi
ncreaseinpopulat
ion:
Ani ncr
easei
npopul
ati
onwil
lleadt
o
i
ncreaseddemandf orgoodsandser vi
ceswhi
chmayli
kel
yleadtoi
nfl
ati
on
EFFECTSOFI NFLATION

Posi t
iveEffects
i
.I tl
eadst oar educti
onindebtburden:Duri
ngi
nflati
on,debtorsgain
becauset her eisexcessmoneyincircul
ati
onwhichwi l
lenablethem pay
theirdebt.
i
i.Highpr ofitmargin
i
ii.Hightaxy iel
d
i
v .Higherout put:hi
gherpri
cesofgoodsandservicesduringinfl
ati
on
encour agespr oducerstoembarkonl ar
gescal
epr oduct
ion

Negat i
veEf f
ects
i
.Itdi scouragessav ings: Duringinfl
ati
on,peopl
espendmor emoney
l
eadi ngt olowornosav i
ngs
i
i.Incr easeininterestrate:Banksgi veloanstocustomer
sataveryhi
gh
i
nter estrate
i
ii
.Ther eisaf al
linthest andar doflivi
ng
i
v.Itcausesbal anceofpay mentdefici
t
v.Itmakespl anningdi ff
iculteg.Gov er
nmentproposedexpendi
tur
eis
i
ncr eased
vi
.Itdi scouragesinv estment
vi
i.Itleadst oaf alli
nt hev alueofmoney
vi
ii
.Cr edit
orslosebecauset hevalueofmoneyr ecei
vedi
slesst
hanthe
valueofmoneyl entout .

WAYSOFCONTROLLI NGINFLATION
Someoft
hewaysofcont
rol
l
ingi
nfl
ati
onare:

a.Useofcont racti
onarymonetarypoli
cy:governmentcanr educemoney
suppl
yinor dertoreduceaggregatedemand.
b.Useoffiscal pol
icy:t
axescanbeincreasedt oreducethedisposabl
e
i
ncomeofi ndiv i
dualsaswellasaggregatedemand
c.Reduct
ioni ngov er
nmentexpenditur
etor educeaggregatedemand
d.UseofbudgetSur plus
e.Gr anti
ngsubsidi
estoproducer
st oi
ncreaseproduct
ion
f.Discouragi
ngimportati
onofgoodsfrom countr
ieswithhi
ghl
evelof
i
nflation
g.Impr ovi
nginfr
astr
ucturet
ostimulat
eproducti
on
DEFLATION
Thisi sapersi
stentf
alli
nthegenerall
evelofpr
icesofgoodsandserv
ices.

CAUSESOFDEFLATI
ON
i
.Budgetsur
plus
i
i
.Incr
easeinbankr ate
i
i
i.I
ncreasei
nPr oducti
on
i
v.I
ncreasei
nt axati
on

EFFECTSOFDEFLATI ON
i
.Moneyl enders/cr
editorsgain
i
i.Standardofl i
vingincreasesasar esul
tofafal
li
nthestandar
dofli
vi
ng
i
ii
.Itleadst oimprovementi nthebalanceofpayment
i
v.Itleadst oanincreasei ntheval
ueofmoneyasar esul
tofafall
min
pri
ce
v.Fi
xedi ncomeear nersgai nbecausemoneycanbuymor ebasketof
goods
vi
.Itencour agessavings

WAYSOFCONTROLLI NGDEFLATI
ON
i
.Reducti
onintaxrate
i
i
.Useofdef i
citf
inancing
i
i
i.Reducti
oninbankr ate
i
v.I
ncreaseinwagesandsal ari
es
v
.Useofopenmar ketoperat
ion