MONEY AND MONETARY

POLICY
Abias, Rizza M.
Benitez, John Edison J.
Dorn, Ami S.
Fabillar, Allen N.
Opeña, Janice P.
Remedio, Jane Kamille
 MONEY AND ITS IMPORTANCE
MONEY
-Is anything that can be used as a medium of exchange
for goods or services .

BARTER
-products or services are exchange for other products or
services.
 FUNCTIONS OF MONEY
1. Medium of exchange
-you can trade your money in the market and in return, get the goods and services that you
want to purchase because money is generally accepted as a means of payment

2. Standard Unit of account

-the value of goods and services are store and services are expressed or quoted with the use
of a single item, usually a country’s currency.

3. Store of Value
-you can keep or save money now and then spend it at a future date because its
capacity to buy the same amount of goods and services is not lost or diminished over time.

4. Standard of Deffered Payment

-is an accepted way to settle debt
 MEASURING THE AMOUNT OF
MONEY IN CIRCULATION
M1
-consists of coins and currency in circulation, checking accounts and travelers
check

M2
- M2 = M1 + small savings accounts, money market funds and small time
deposits

M3
-M3 = M2 + large time deposits, large money market funds and repurchase
agreements, which are financial instruments generally used by large businesses and
institutions.
 MONEY SUPPLY AND DEMAND
Currency
in
Circulation

Money
Supply
Demand
Deposits
 MONEY SUPPLY AND DEMAND

Money Supply
-Total Quantity of money in the economy at any given time
Currency in Circulation
-includes coins and paper bills in the hands of the public.
Demand Deposits
-balances in bank accounts that depositors can access on demand by
writing a check.
 MONEY SUPPLY AND DEMAND
The demand for money may come in THREE FORMS:

1. Transaction Demand
-money serves to pay off dealings of people and businesses.

2. Precautionary Demand
-use of money for sudden or emergency expenditures.

3. Speculative Demand
-money is used to approximate the loss of value of one’s money,
especially it is held for investment purposes.
 QUANTITY THEORY OF MONEY

Quantity theory of Money

-was developed to described the effect of the supply of money
in the economy.
-it has been simplified to explain how increased money supply
could cause inflation but not increased output
 QUANTITY THEORY OF MONEY

MV=PQ
Where:
M is money supply or money Stock
V is velocity of circulation/money
P is average price level
Q is quantity (real GDP)
 QUANTITY THEORY OF MONEY

Velocity of money
-is the average number of times a peso changes hands during a
year.
-it varies with money supply, price changes and output.

𝑃𝑄
v=
𝑀
 THE ROLE OF MONETARY
INSTITUTIONS IN THE ECONOMY
Bangko Sentral ng Pilipinas (Central Bank of the Philippines)
-was established on January 3, 1949 by virtue of Republic Act No.265.

Primary objectives:
a) To maintain the monetary stability in the country
b) To preserve the international value of the peso
c) To promote rising level of production, employment, and real income in the
Philippines.
*To achieve these objectives, the BSP, in January 2002, adopted an
economic policy called Inflation Targeting.
 THE ROLE OF MONETARY
INSTITUTIONS IN THE ECONOMY
Bangko Sentral ng Pilipinas (BSP)

- July 3, 1993 , through R.A. 7653 BSP was put up as a central

monetary authority.
-BSP likewise called lender of the last resort.
-From whom ailing or bankrupt banks can borrow if other banks in the
financial system cannot provide them with the necessary funds.
 FINANCIAL INSTITUTIONS
Philippine financial or monetary system
-is a network of markets and institutions that transfer funds from individuals
and groups who save money to individuals and groups who want to borrow
money.

Banks Classified as:

a) universal and commercial
b) rural bank
c) thrift bank
– which include:
1. Savings and mortgage banks
2. private development banks
3. microfinance institutions
4. stock savings
5. loan associations
 NON BANKS INSTITUTIONS
Non banks institutions are:
a) contractual savings institutions
– such as Insurance companies
b) Investment institutions
c) Securities market institution
1. Securities brokers and dealers.
2. Lending investors
3. Organized exchanges
d) Credit card companies
e) Pawnshops
 MONETARY POLICY

Monetary Policy
-process undertaken by government, central bank or currency
board to control the availability and supply of money as well as the
amount of bank reserves and loan interest rates.

-can either be expansionary (increasing money supply) or

contractionary (decreasing money supply).
 EXPANSIONARY AND TIGHT
MONETARY POLICY
Expansionary Monetary Policy
-When the central bank raises the money supply interest rates fall.
-Lower interest rates reduces the costs of investment

Contractionary Monetary Policy

-Central bank contracts the money supply in response to fears of rising
prices. The lower money supply increases interest rates. The result of a tighter
monetary policy is lower investment and decrease in the nation’s output.
 TOOLS FOR MONETARY CONTROL
The following is a list of important instruments of monetary control used by the
Monetary board:

a) Reserve requirement
– is the percentage of deposits that banks are mandated to keep in their vaults
for safekeeping by the BSP.

b) Discount Rate
– is the interest charged by the banks to wish to borrow from it.
-interest rate on loans that BSP charges on commercial papers

c) Open Market Operation

– refer to the buying and selling of government securities by the BSP.
Bangko Sentral ng Pilipinas (BSP)
-performs and supervises monetary policies to stabilize prices and sustain
growth.
-it has the privilege of controlling money supply.
To achieve the objectives of BSP, in January 2002, adopted an economic policy
called Inflation Targeting.

Inflation Targeting
-The BSP announces a projected inflation rate and determines appropriate
monetary policies to achieve this target. It is important to monetary authorities to be
transparent to the market and the public.
*effect of inflation on interest rates and investment choices.
-it is an important tool to ensure price stability in the economy.
 FEDERAL RESERVE SYSTEM
Federal Reserve System (US)
-an agency executing monetary policy, which can either be
contractionary or expansionary.

Aims:
1. To slowdown the supply of money and limit it to prevent the devaluation of
asset
2. Slowdown inflation
 EFFECTS OF MONETARY POLICY
The Monetary Transmission Mechanism
-The monetary transmission mechanism represents the way by which
changes in the supply of money are translated into changes in output,
employment, prices and inflation.
 DISADVANTAGE OF MONETARY POLICY
1. It does not guarantee economy recovery.

2. Its ability to cut interests rates is not a guarantee.

3. It can take time to be implemented.

4. It could discourage businesses to expand.

 FOREIGN-EXCHANGE RESERVES

Forex reserves (FX Reserves)

-money or other assets held by a central bank or other monetary
authority so that it can pay its liabilities if needed,.

-reserves are held in one or more reserve currencies, mostly the

united states dollar and to a lesser extent euro.
 BANK RESERVES
Bank Reserve
- a currency deposit that is not lent out to the banks clients.
-minimum reserve requirements are stablished by central banks.

Required Excess
Reserves Reserves

Bank
Reserves
 BANK RESERVES
Excess Reserves
- Represent any vault cash that banks hold that is in excess of the
required reserves amount.

Required Reserves
- Represent the amount of funds a bank must hold in its cash vaults or
deposit with the central bank against certain liabilities. (Federal Reserve
Board’s Regulation).
-The RESERVE RATIO determines the required reserves
 BANK RESERVES

Reserve Required Ratio

-Can be used by National Authorities as a tool to implement monetary
policies.
 PROVISIONS ON BANKING
REGULATIONS
New Central Bank Act (Republic Act No. 7653)

1. The BSP conducts regular Investigation of banks not more than Once
a year.
2. The management of a locally incorporated bank is vested in a
board of directors with 5 to 15 members at least 2 of whom must be
independent directors.
3. Banks are required to maintain reserves against their deposit-
substitute liabilities.
4. Funding for banks comes from equity contributions, loans and credit
accommodations from BSP and other lenders.
 PROVISIONS ON BANKING
REGULATIONS
5. Banks are subject to the BSP’s Financial Consumer protection
framework.
6. No voluntary dissolution and liquidation of a bank can be
undertaken without prior approval of the Monetary Board.
7. If a bank become undercapitalized, it may be placed under
conservatorship by the BSP.
8. A bank reserve is the currency deposit that is not lent out to the
banks clients.
Thank you!