Money, Money Supply & Monetary Policy


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

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Money, Money Supply & Monetary Policy

  1. 1. Jean Lee C. Patindol
  2. 2. The Circular Flow of Expenditure and Income Jean Lee C. Patindol
  3. 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. 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. 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. 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. 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. 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. 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. 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