1. MONEY AND
MONETARY POLICIES

2. A. Function of Money & Money
Supply
Money as a medium of exchange
began to assume a significant role
in the advent of the market
economy marked by 1-3
specialization, interdependence
and trade.

4. Money Supply
Money is a vehicle of economic
activities when in circulation (i.e. in the
circular flow)

6. The stock of money serving this function is
called money supply and consists of the
following:
Coins and Bills in circulation
Demand deposits in banks
- Savings Deposits
- Time Deposits
Deposit Substitutes

7. Dependencies and
Resources

8. Money Velocity &
Income
4. Money Supply as medium of exchange
multiplies into income. The multiplier
coefficient is only dependent on the rate of
money outflow.

10. Table 33 represents the country’s domestic
liquidity from 1981 to 2001. The economic crisis
in 1997 was marked by declining levels of
production and increasing rates of inflation
(price increase) and unemployment.
However the overall level of money supply
continued to increase despite the economic
crisis due to two factors.
The said overall increase in money supply was
presumably pocketed by the economy’s big
earners and channeled to quasi money.

12. MV = Y
Y = PQ (Economic Income or Income derived from
production)
Alternatively
MV= PQ
• Where :
• M = Money Supply
• V = Velocity
• Y = Nominal Money Income
• P = Price
• Q = Volume of Goods and Services

13. The equation embodies the quantity
theory of money and implies that the same
level of money supply increases
(decreases) in the money velocity.

14. B. BANKS AND
MONEY SUPPLY

15. The Fractional Reserve System
5. Banks are supposed to be a conduits
of funds linking investors or borrowers
to the sources. As such, they accept
deposits which chiefly supply their
lending operations.

16. However, commercial banks in particular
can create deposit liabilities (i.e. to
depositors and borrowers) greater than
their reserves or money in vault which is
the essence of the fractional reserve
system.
Thus, a commercial bank can lend more
than its actual deposit by creating more
deposit liabilities while maintaining a
smaller reserve to meet fractional cash
demand.

17. TABLE 34
Deposit Liability Creation
Asset Liabilities
100,000 100,000
80,000 80,000
60,000 60,000
: :
n n
_________ _________
500,000 500,000

18. Money Creation
It has just been illustrated that the fractional
reserve system enables commercial banks to
lend more than their reserves. They do so by
creating more demand deposits which can
circulate like money in the form of checks
while supported by a smaller cash amount to
only meet fractional cash demand.
Therefore, 6. commercial banks create more
money by lending more and creating more
demand deposits while the opposite is true
when they tighten credit.

19. The amount of money checks that a commercial
bank can cause to circulate from every peso of
reserves is theoretically expressed as follows:
L = mR
m = L/R
Since: r = R/L < 1
Therefore: m = 1/r
Where:
m = Money multiplier
R = reserves
L = deposit liabilities
r = Ratio of reserves to deposit liabilities or fractional cash
demand ratio

20. C . SOURCES OF MONEY
SUPPLY

21. The 7. lending operation of the
banking systems determines the
volume of money checks it creates.
Thus , lending more/less within the
limits of the fractional cash
requirements of the deposits
increases/decreases money checks
and the level of money supply.

22. The government print new money at times ,
to help finance its expanding operations. This
increases currency in circulation and the
money checks that banks create from
currency deposits.
8. Money supply tend to increases with
foreign currency inflows while the opposite is
true with foreign currency outflows. However
, it is the net effect of foreign currency
inflows and outflows that changes the level of
money supply.

23. 9. Taxes also changed the level
of money supply as leakages from
the circular flow. Taxes are
foregone consumption and savings
which could otherwise be part of
currency in circulation and reserves
which enables banks to create
money checks.

24. The unspent portion of the budget
surplus (unspent tax revenue) only
decreases money supply when kept in
the National Treasury and not in the
banking system where it can be
channeled back to circulation. On the
other hand , government borrows from
the banking system to finance deficit
spending.

25. D. MONEY AND THE
CENTRAL BANK

26. It is the reponsibility of Bangko
Sentral ng Pilipinas to
administer the monetary,
banking, and credit system of
the republic as embodied in
Section 2 , Articles of the
amended Republic Act 2656.

27. The Objectives are as follows:
To maintain internal and external
monetary stability in the Philippines; and
to preserve the international value of the
peso and its convertibility to other freely
convertible currencies.
To foster monetary , credit , and exchange
conditions conducive to a balanced and
sustainable growth of the economy.

28. The Confidence in Money
The 10. Central Bank is the only
authorized government entity to print
money and is responsible for the proper
administration of the monetary ,
banking , and credit system of the
republic to achieve monetary stability
and create conditions conducive to
economic development.

29. MONETARY
POLICIES

30. 1) Some policy concept
The central bank used monetary policy to
regulate money through the credit and
banking system in order to attain monetary
stability conducive to economic development.

31. 2) short-run Tools
Affecting Money Supply
A. RESERVE REQUIREMENTS
It has been explained in section B.2 of this
chapter that their actual deposits (reserves)
and create money by creating more deposit
liabilities.
MONEY CREATED = (1/r)(R)
MONEY CREATED = as r with R constant as r

32. B. Rediscounting
The central bank can infuse money into
the coffers (reserves) of the banking system by
buying its loan papers (i.e. loan receivables) at
rediscounted values.
The central bank can raise the level of
reserves and credit money by widening its
rediscounting windows and buying more loan
papers at lower and more encouraging
rediscounting rate .

34. MONEY CREATED = (1/r-1)(R)
MONEY CREATED = as R with r
constant as R

35. The central bank offers a purchase or
present value derived by discounting the
maturity value of the paper to the purchase
period using a rate called the rediscount rate.
P = F/ ( 1 + r ) t

36. C. Open market Operation
FRAMEWORK
Another way the central bank can change
the level of money supply is by buying and
selling government securities in the open
market.
GOVERNMENT SECURITIES-> are financial papers
with short term maturities.

38. COMPARATIVE ADVANTAGE
Central bank has more control over bank
reserves with this instrument. To decrease
money supply , it simply offers more treasury
bills at higher interest to draw a momentum
that it can control within the volume it aims
to transact.

39. EFFECTIVENESS IN
TRIMMING LIQUIDITY
The central bank floated more treasury
bills with a weighted average interest rate
of 35% relatively attractive to the
prevailing rate of 20%-28% for short term
loans and placements.

40. D. Selective control
The effective range of an instrument
may not necessarily lead to it’s target and
even if it does , may spill over to factors
which are not its concern and thud create
new problems.

41. E. The need for policy Coordination
It is not enough that an instrument be
confined to its target to create positive
effects. For one, applying the instrument
alone may be inadequate to solve the
problem.