An introduction to money, money supply and monetary policy, for USLS CO2D class, 1st semester 2013-14

1. Jean Lee C. Patindol

2. The Circular Flow of Expenditure and Income
Jean Lee C. Patindol

3. What is Money?
• Anything used as a medium of exchange in an
economy
• Forms/Development
– Barter
– Commodity (cowrie shells, salt, cattle, even slaves)
– Coinage
– Paper money
– Electronic money
– possible new forms?
Jean Lee C. Patindol

4. Monetary Standards
• Monetary Standards – standards by which
currency is backed up so that its value is
guaranteed
– Gold
– Silver
– Bimetallic
– Dollar
– Sterling
– Managed currency/ Fiat (“by decree”)
• Money is wanted not because of its metal content
but ability to buy goods
Jean Lee C. Patindol

5. Functions of Money
• Primary Functions
– Unit of value: unit of
accounting in which the
value of goods and
services is measured
and expressed
– Medium of exchange:
means of payments for
transactions
• Secondary
Functions
– Standard of deferred
payment: standard for
payments of debts or
contracts in which
payments are deferred
– Store of value: store of
holder of purchasing
power that can be used
through time
Jean Lee C. Patindol

6. Types of Money (Money Supply)
• M1 – currency in circulation plus demand deposits
• M2 – broad money/quasi-money or near money:
savings and time deposits
• M3 – total liquidity: M2 plus deposit substitutes
(e.g., debt papers)
• M4 - M3 + peso equivalent of dollar deposits of
residents in Foreign Currency Deposit Units
(FCDUs)
Jean Lee C. Patindol

7. How Money is Created
• Printed by the central bank
• Distributed by the banking system into the economic
system by –
– Buying $ from the banks or public
– Lending money to the banks
– Lending money to the government
Why can’t the Government just print lots of money
and give it to everyone then?
- More money after few goods leads to inflation
- Inflation reduces the purchasing power of money and can lead to
economic and social disruption/destruction if not checked
Jean Lee C. Patindol

8. Monetary Policy
• The Bangko Sentral ng Pilipinas’ (B.S.P.) mandate is “to
maintain price stability conducive to a balanced,
sustainable growth of the economy. It shall promote
and maintain monetary stability and convertibility of the
peso.” It is also tasked to “control any expansion
(loosening) or contraction (tightening) in the money
aggregates which is prejudicial to the attainment of
maintenance of price stability.”
• Targets: Control and management of -
– Monetary aggregates or money suppy
– Interest rates
– Inflation
•
Jean Lee C. Patindol

9. Monetary Policy Tools
• Reserve requirements
– Increase: tight policy
– Decrease: loose policy
• Purchase/sale of foreign exchange
– Purchase: loose policy
– Sale: tight policy
• Open market operations (issuance of Treasury bills or T-bills)
– Issue: tight policy
– Redeem: loose policy
• Rediscounting of loans
• Selective credit controls
• Moral suasion
Jean Lee C. Patindol

10. Jean Lee C. Patindol
Money is only a tool. It will take
you wherever you wish, but it will
not replace you as the driver.
- Ayn Rand