Chapter 10

MONEY AND MONETARY POLICIES

CHAPTER OUTLINE

FUNCTIONS OF MONEY
-

As a medium exchange
As a unit of account

THE DEMAND FOR MONEY

(3) Category:
- Transaction Demand
- Precautionary Demand
- Speculative Demand
TOTAL DEMAND FOR MONEY
-

Money Supply

MONEY VELOCITY AND INCOME

BANKS AND MONEY SUPPLY

a) The Fractional Reserve System
b) Money Creation

SOURCES OF MONEY SUPPLY

MONEY AND THE CENTRAL BANK

a) Functions of the Central Bank
b) The Confidence on Money

NET DOMESTIC ASSETS (NDA)

FUNCTIONS OF MONEY

As a medium exchange
Began to assume a significant role in the advent of the market economy marked by
specialization, interdependence, and trade. It serves as a vehicle for the free flows of
products to satisfy human wants.

As a unit of account
Money serves as a common yardstick or denominator by which we judge and
compare the values of goods and services available in society.

THE DEMAND FOR MONEY

(3) Category:

Transaction Demand (Mt = f (FY)

-

People want to keep cash is for them to be able to carry out ordinary day to day
transactions. Due to the uneven timing of pay periods or receipt of income with
expenditures payments.

Precautionary Demand (Mp = f (FY)

Demands for security against unforeseen expenditures and unexpected loss of
income.

Speculative Demand (Msp = (fi)

Interest rates are high people; convert their cash balances into high interest yielding
such as bonds, treasury bills and other securities.

TOTAL DEMAND FOR MONEY

Money Supply
-

The stock of money

Money is a vehicle of economic activities when in circulation.

It consists of:
Coins and bills in circulation
Demand deposits in the bank
Quasi-Money
- Savings Deposit
- Time Deposits
Deposit Substitutes

MONEY VELOCITY AND INCOME

Money Velocity
-

The two main determinants embody the wider concept of the multiplier process.

BANKS AND MONEY SUPPLY

The Fractional reserve System

Commercial banks in particular can create deposit liabilities greater than their reserves or
money in vault which is the essence. Only a fraction of the total amount of checks
circulated is encashed from the banks, at any one time.

Money Creation
Commercial banks create more money by lending more and creating more demand
deposits while the opposite is true when they tighten credit.

SOURCES OF MONEY SUPPLY

Lending Operation of the Banking System determines the volume of money checks it
creates.
Taxes also change the level of money supply as leakeages from the circular flow.

MONEY AND THE CENTRAL BANK

a.) Functions of the Central Bank
It is the responsibility to administer the monetary.
Objectives:
1. 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.
2. To foster monetary, credit and exchange conditions conducive to a balanced and
sustainable growth of the economy.

b) The Confidence on Money

It preserves the confidence of the people on money as a thing of value and an
essential institution of the economic system.

NET DOMESTIC ASSETS (NDA)

CHAPTER 10
MONEY AND MONETARY
POLICIES
(Macroeconomics)

Submitted by: PRIMO O. SOLIS, JR.

BSBA-HRDM (3rd yr. irregular)
Submitted to: Mrs. RESTUBOG

Chapter 9
PRICES AND INFLATION

CHAPTER OUTLINE

THE MEANING OF INFLATION

HYPER-INFLATION

UNDESIRABILITY OF INFLATION

INFLATION GAINERS

DEMAND-PULL INFLATION

THE QUANTITY THEORY OF MONEY

- Monetarists
COST-PULL INFLATION
-

Philips Curve

MEASUREMENT OF PRICE INCREASES

-

Consumer Price Index (CPI)

Retail Price Index (RPI)

Wholesale Price Index (WPI)

THE MEANING OF THE INDEX

THE BASE YEAR

PRICE INDEX NUMBERS

THE MEANING OG INFLATION

Is generally used to mean any sustained or continuing increase in prices.

HYPER-INFLATION

It will stand still and destroy the currency itself.

UNDESIRABILITY OF INFLATION

Economic plans and policies are intended to improve the standards of living of
people. It means among other things, the people should be able to buy more
given the incomes that they have. It means that the people should be able to buy
better quality of food, live in better houses, and send their children to school.
First, people who have fixed incomes are severely affected during inflation.
Secondly, because of increase prices benefits of pensioners from the SSS or
the GSIS would result in a net loss to the pensioner.

INFLATION GAINERS

The first group of gainers are people who have flexible incomes.
The second group of gainers during the inflation are the speculators.
The third group of gainers are the debtors.

DEMAND-PULL INFLATION

Those who buy goods and services desire to purchase goods and services
greater than what the economy can produce. Excess demand for commodities
tends to push prices up.

THE QUANTITY THEORY OF MONEY

In general, the greater the volume of transactions in the economy, the higher the level
of money required to finance the transactions.

MONETARISTS
-

Believers in the modern version

They do not necessarily accept the constancy of the velocity of money.
Control the supply of money to influence the course of the growth of the
economy.

COST-PULL INFLATION

Is the type of inflation where increase in the costs of production pushes prices
up.
FACTORS OF COST-PULL INFLATION:
First factor is oil price increase.
Second factor is the demand for high wages by labor unions.
Third factor is the monopolies in society.
Fourth factor is the devaluation.
Philips Curve
An important starting point in the analysis of inflation is the empirical
relationship between unemployment and the inflation.

MEASUREMENT OF PRICE INCREASES

-

Consumer Price Index (CPI)

Is intend to provide a general measure of average monthly and annual

changes in the retail prices of commodities commonly bought by consumers in
the Philippines, covering all income households.
-

Retail Price Index (RPI)

Designed to measure monthly changes of the prices at which retailers dispose

of their goods to consumers and end users.
-

Wholesale Price Index (WPI)

Measures monthly changes in the general price level of commodities that flow
into wholesale trade intermediaries in Metro Manila, it measures price changes
during trade turnover.

THE MEANING OF THE INDEX

Index Numbers
Is a statistical measure designed to show changes in a variable or group of
related variables.
-Price

-Quantity
-Value
THE BASE YEAR
Is the year with which variables and the given year are being compared.

PRICE INDEX NUMBERS

(3) TYPES OF PRICE INDEX NUMBERS
1. Price Relatively
2. Unweighted Price Index
a.) Simple Aggregative Price Index
b.) Average Price Index
3. Weighted Price Index
a.) Laspayres Index
b.) Paasche Index

CHAPTER 9
PRICES AND INFLATION
(Macroeconomics)

Submitted by: PRIMO O. SOLIS, JR.

BSBA-HRDM (3rd yr. irregular)
Submitted to: Mrs. RESTUBOG