# The sought out to understand the important correlation between

The research study adopted the quantitative study design to
be able to determine the relationship between inflation, interest rates,
exchange rates and economic growth also to explain variations between them. The
area of study is the Nigerian economy and the study sought out to understand
the important correlation between inflation, interest rates, exchange rates and
economic growth. The study chose to use the sample period 1981-2016 for which
data is collected analyzed and interpreted. Once the relationship is clarified
between these variables this can assist in policy formulation since the trends
of the variables will be known.

The current study relies on the yearly secondary data. The
sample size to be used is 35years which is from 1981-2016. The data is obtained
from the Central Bank of Nigeria (www.cbn.gov.ng).

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The data represent two variables independent and dependent
which are inflation, interest rates, exchange rate and economic growth
respectively. I have chosen Eviews 9 software to estimate the multiple
regression model. Also, to emphasize the existence and influence of other
factors, not considered in this model, we have included the free term C. the
estimation of the parameters is based on the least squares method. The selected
model used for this study is as follows:

RGDP=?0+ ?1RER+ ?2INTR+ ?3INF + e

Y:
Dependent variable which is the GDP

?0: Intercept of the regression model

RER:
Real Exchange Rate

INTR:
Interest Rate

INF:
Inflation

RGDP:
Real Gross Domestic Product

e: Error term, reflect that this is an estimated model not
actual relationship of the variables

The study was done by using reliable secondary yearly data
which was not manipulated.

Definition of Variables

INFLATION: Inflation is a
rise in the general level of prices of goods and services in an economy over a
period of time. There are a few causes of inflation where aggregate demand
increases faster than aggregate supply, therefore increasing the cost of goods
and services. The imbalance of aggregate demand and supply is linked to the
government’s deficit, expansion of bank’s interest rates and the increase of
foreign demand. Inflation also increases the price of goods and the price of
work labor thus the cost of goods and selling price increases. Inflation has a
few indictors such as Consumer Price Index (CPI), Wholesale Price Index (WPI),
and Implicit Price Index (deflator GDP).

GROSS DOMESTIC PRODUCT (GDP): GDP
is a good indicator of a country’s microeconomic status and development. GDP
can be seen from two sides such as the expenditure and income approach. First
we will look at the expenditure approach. It takes account of all goods and
services within a given time period. A good example will be such as household
items that we buy daily, purchases from a foreign investor and services. On the
other hand, the income approach can be best described as the level of worker’s
compensation, rent, interest rates, income of a particular business, tax of a
produced goods and import level

EXCHANGE RATES: in the
theory of economics, exchange rate is a value that a currency has compared to
another currency. Exchange rate can be divided into two categories, fixed
exchange rate and flexible exchange rate. In a fixed exchange rate, it is set
by the government, whereas flexible exchange rate is set by the market with or
without the influence of the government.

INTEREST RATES: interest
rate cane be described as a value that is gained in the effort of a value that
has been saved or invested. These rates will reflect the interaction between
exchanges of money. There are short term and long term rates. Short term rates
is influenced by the Central Bank, thus money is being monopolized accordingly.
In long term rates however, shows the condition of the current economy and the
possibility of inflation. Both of the rate are linked and work with one another.