The Multiplier Effect of Consumption Function on Aggregate Demand in Nigeria: Aftermath of the Global Financial Recession

Abstract

This paper constructed a highly simplified model to highlight the effect of macroeconomic variables on aggregate demand and the multiplier effect on the Nigerian economy. Quarterly data between 2009 and 2014 were used and the OLS technique was employed to examine this effect in the aftermath of the global financial recession. The study found out that the adverse effect of the global financial crises was minimal on national income in Nigeria. The comparative analysis reveals that the Nigerian economy performed better in the post global financial recession era than in the preceding period. Consumption, Investment, Government Expenditure and Balance of Trade contribute positively to the growth of aggregate demand within the study period; however, the level of investment in Nigeria is not significant. The multiplier reveals that a N1 increase in investment will eventually increase income by N3.13 if the MPC is 0.68. The MPC of 0.68 supports Keynes' postulation of the income-consumption relationship and proves that income is a determinant of private consumption expenditure in Nigeria. The study recommends that; the government should respond to the shortcomings in investment by implementing demand management policies through the use of fiscal and monetary policies to make short run adjustments to the level of aggregate demand; second, there is need for regular intervention to cater for market imperfections and slow adjustment which could constrain the multiplier; and finally, the macroeconomic objective of full employment should be pursued as this constitutes the last resort by which total production could be permanently raised.