Abstract

The main role of money supply (M2) on GDP of Pakistan is described. The excessive money supply (M2) by SBP (State Bank of Pakistan) to run the country entails to high rate of inflation if the indicators i.e. CPI, interest rate are not controlled within the prescribed limits. The more the money supply will be in the economy, the greater the inflation rate would be. No sooner, the indicators improves production in all sectors i.e. industry, agriculture, education, health and basic infrastructures increases, money supply would be lesser, inflation decreases and GDP increases accordingly. We have taken into consideration the data for 12 years (2000-2011) and analyzed this data by using the Regression Model. In this model we have taken three independent variables that are inflation rate, interest rate and CPI because money supply is affected both one of them and one dependent variable that is GDP. The CPI and interest rate have a significant impact on GDP and inflation rate has insignificant impact on GDP.