MOney and

Monetary
POlicy
 Intended Learning Outcomes (Ilo)

• Explain thE importancE of

monEy.
• IdEntify thE tools utilizE for
monEtary control.
• discuss thE EffEcts of

incrEasing monEy in
circulation.
 Table of contents

01 monEy and 02 typEs of monEy

functions of monEy

mEasuring monEy
03 (m1 and m2)
04 tools for monEtary
control

EffEcts of
05 monEtary policy
 money and
functions of
money
Elson Garcia
 What is Money?
monEy is anything
that can bE usEd
as a mEdium of
ExchangE for
goods and
sErvicEs
 A Brief History of Money
KIng alyattEs of lydIa
china usEd small mIntEd thE fIrst offIcIal
currEncy- coIns taht
rEplicas of tools
wErE madE from mIxIng
and wEapons as an sIlvEr and gold
ExchangE mEdium
1, 100 BC 600 BC

Barter System 700 BC 600 BC

mEtal coIns wErE usEd In
dirEct tradE of fIrst coIns parts of EuropE untIl
goods and movEd Into 1,600 a.d. untIl thEy
sErvicEs papEr monEy startEd to usIng papEr
notEs whIch opEratEd
much lIKE what wE arE
usIng today
 A Brief History of Money

21ST CENTURY

raIsE of mobIlE
paymEnts and
vIrtual currEncy.
bItcoIn was
rElEasEd In 2009
 Function of money
In gEnEral tErms, thE main
function of monEy in an
Economic systEm is “to facilitatE
thE ExchangE of goods and
sErvicEs and hElp in carrying
out tradE smoothly.” Its basic
charactEristic is gEnEral
accEptability. functions of
monEy arE rEflEctEd in thE
following wEll- Known couplEt:

“monEy is a mattEr of functions

four a mEdium, a mEasurE, a
standard, a storE.”
 Function of money
thus convEntionally monEy
pErforms thE following four
main functions, Each of which
ovErcomEs onE or thE othEr
difficulty of bartEr. mEdium of
ExchangE and mEasurE of
valuE arE primary functions
bEcausE thEy arE of primE
ImportancE whErEas standard
of dEfErrEd paymEnt and
storE of valuE arE callEd
sEcondary functions bEcausE
thEy arE dErivEd from primary
functions.
 Function of money

thE valuE of a you can storE thE

A medium of Exchange
product or sErvicE
The Standard of purchasing powEr of
In an ExchangE is dEtErminEd on thE Deferred Payments monEy and KEEp a part
Economy, monEy basis of thE monEy of it for futurE usE –
monEy plays an monEtary savings.
plays an nEEdEd for its
possEssion. this important rolE you can usE your
intErmEdiary rolE. currEnt incomE for
hElps in maKing thE in lEnding and
It maKEs thE currEnt consumption
ExchangE a borrowing. as wEll as futurE
ExchangE systEm
mutually profitablE monEy is taKEn consumption
smooth and activity through savings.
as a loan and
convEniEnt. A measure of Value Store of Value
rEpaid aftEr a
https://www.youtube.com/hashtag/volleyball
timE-gap.
 Types Of Money
throughout timE, thErE havE bEEn various forms of
monEy from sEashElls and sEasonings to banKnotEs and
dEbit cards. currEntly, fiat monEy is thE monEy typE
bEing usEd.
 Taviel Galema

1. Fiat Money
Examples: Banknotes (paper money) and coins
fiat monEy (fiat currEncy) is monEy
whosE valuE is not basEd on its
inhErEnt valuE but is basEd on an
authoritativE dEcision (fiat) by thE
govErning body. thE govErnmEnt
dEclarEs it as lEgal tEndEr and it
must thEn bE accEptEd as a form of
paymEnt EvErywhErE. duE to not
having an intrinsic valuE, a partially
dEstroyEd bill can bE rEplacEd by thE
fEdEral rEsErvE banK. on thE othEr
hand, commodity monEy can not bE.
 Taviel Galema

2. Commodity Money
Examples: Precious metals (i.e. gold), salt, beads, alcohol
unliKE fiat currEncy, thE valuE of
commodity monEy is intrinsic; its valuE
comEs from thE commodity it is madE from.
If thE monEy is dEstroyEd, it cannot bE
rEplacEd. It is also probably thE EarliEst
form of monEy. thEsE commoditiEs arE usEd
as a mEdium of ExchangE and gain thEir
valuE from thE scarcity of thE itEms. thE
usE of this typE of monEy is liKE using thE
bartEr systEm whErE goods and sErvicEs
arE ExchangEd for thE liKE. unliKE thE
bartEr systEm, using commodity monEy
functions as a unit of account that
allows you to comparE thE worth of
goods and sErvicEs.
 Taviel Galema

3. Representative Money
Examples: Certificates, paper money, token coins
rEprEsEntativE monEy, liKE fiat
monEy, has no valuE of its own.
unliKE fiat monEy, it is bacKEd by
a commodity. as a commodity-
bacK monEy, it could bE
ExchangEd for prEcious mEtals
(liKE gold) hEld within a banK
vault. It was EasiEr to carry a
cErtificatE around rathEr than
a chEst full of gold.
 Taviel Galema

4. Fiduciary Money
Examples: Checks, bank drafts
dEriving from thE latin word
fiducia, to trust, fiduciary
monEy worKs on thE promisE
and trust that it will bE
ExchangEd for fiat or
commodity monEy by thE issuEr
(banK). pEoplE arE not rEquirEd
to taKE it as a form of paymEnt
b E c a u s E i t i s n o t a
govErnmEnt- ordErEd lEgal
tEndEr.
 Taviel Galema

5. Commercial Bank Money

Examples: Funds in a checking account
commErcial monEy (also Known as dEmand dEposits) is a
claim against a banK for thE purchasE of goods and
sErvicEs (through thE mEans of withdrawing in pErson,
chEcK, atms, or onlinE banKing). It is a dEbt-crEatEd
currEncy by thE banK. thEy crEatE morE monEy through a
procEss callEd fractional-rEsErvE banKing. In this, only a
cErtain pErcEntagE of monEy thE banK “has” is hEld within it.
thE othEr pErcEnt is givEn to othErs in thE form of loans, in
doing so, thE banK maKEs bacK morE monEy from thE intErEst
and fEEs chargEd to customErs.

In short, thE banK is loaning out thE monEy you dEposit to

givE othErs dEbt and crEatE morE monEy from thE intErEst
placEd on it.
 Alfred Fernandez

measuring money (m1 and m2)

 liquidity rEfErs to
how quicKly an
assEt can bE usEd to
buy a good or
sErvicE. liquidity is a
rElativE concEpt.
cash is vEry liquid
whilE savings
account is lEss Liquidity
liquid.
Economists gEnErally usE two
dEfinitions of thE supply of
monEy: m1 and m2. m1 includEs
thosE assEts that arE thE most
liquid such as cash, chEcKablE
(dEmand) dEposits, and
travElEr’s chEcKs. m2 includEs
m1 plus somE lEss liquid (but still
fairly liquid) assEts, including
savings and timE dEposits,
cErtificatEs of dEposit, and
monEy marKEt funds. lEt’s
ExaminE thEsE two monEy
dEfinitions in morE dEtail.
 M1
m1 is thE most narrow dEfinition of thE monEy
supply. It includEs coins and currEncy in
circulation.

closEly rElatEd to currEncy arE chEcKablE

dEposits, also Known as dEmand dEposits.
thEsE arE thE amounts hEld in chEcKing
accounts. thEy arE callEd dEmand dEposits
or chEcKablE dEposits bEcausE thE banKing
institution must givE thE dEposit holdEr his
monEy “on dEmand” whEn a chEcK is writtEn or
a dEbit card is usEd. thEsE itEms togEthEr—
currEncy, and chEcKing accounts in banKs—
maKE up most of m1. travElEr’s chEcKs arE
also includEd in m1, but havE dEcrEasEd in usE
ovEr thE rEcEnt past.
 M2
a broadEr dEfinition of monEy, m2 includEs EvErything in m1 but
also adds othEr typEs of dEposits. for ExamplE, m2 includEs
savings dEposits in banKs, which arE banK accounts on which
you cannot writE a chEcK dirEctly, but from which you can
Easily withdraw thE monEy at an automatic tEllEr machinE or
banK. many banKs and othEr financial institutions also offEr a
chancE to invEst in monEy marKEt funds, whErE thE dEposits of
many individual invEstors arE poolEd togEthEr and invEstEd in a
safE way, such as short-tErm govErnmEnt bonds. anothEr
ingrEdiEnt of m2 is small dEnomination cErtificatEs of dEposit
(cds) or timE dEposits, which arE accounts that thE dEpositor
has committEd to lEaving in thE banK for a cErtain pEriod of
timE, ranging from a fEw months to a fEw yEars, in ExchangE for
a highEr intErEst ratE. In short, all thEsE typEs of m2 arE monEy
that you can withdraw and spEnd, but which rEquirE a grEatEr
Effort to do so than thE itEms in m1.
 m1 and M2
Figure 1. The Relationship between
M1 and M2 Money. M1 and M2
M2 Money Supply
money are the two mostly
commonly used definitions of • savings M1 Money Supply
dEposits
money. M1 = coins and currency in
• monEy marKEt • coins and currEncy
circulation + checkable (demand) funds in circulation
deposit + traveler’s checks. M2 = • cErtificatE of • chEcKablE dEposits
M1 + savings deposits + money dEposit • travEllEr’s chEcK
market funds + certificates of • othEr timE
deposit + other time deposits. dEposits
 Where Does “Plastic Money” Fit In?
• dEbit card - liKE a chEcK, is an instruction to thE usEr's
banK to transfEr monEy dirEctly and immEdiatEly from
your banK account to thE sEllEr.
• crEdit card - immEdiatEly transfErs monEy from thE crEdit
card company's chEcKing account to thE sEllEr, and at
thE End of thE month thE usEr owEs thE monEy to thE
crEdit card company.
-a crEdit card is a short-tErm loan.
-not considErEd monEy.
• smart card - storEs a cErtain valuE of monEy on a card
and thEn onE can usE thE card to maKE purchasEs.
-ExamplEs: long-distancE phonE calls or maKing
purchasEs at a campus booKstorE and cafEtEria
• crEdit cards, dEbit cards, and smart cards arE diffErEnt
ways to movE monEy whEn you maKE a purchasE.
monEy mEasurEs in thE unitEd statEs
thE u.s. fEdEral rEsErvE producEs two mEasurEs of monEy. thE first is
m1, which comprisEs notEs and coins in circulation, travElErs’ chEcKs
of nonbanK issuErs, dEmand dEposits at commErcial banKs, and othEr
dEposits on which chEcKs can bE writtEn. m2 is thE broadEst mEasurE
of monEy currEntly producEd by thE fEdEral rEsErvE and includEs m1,
plus savings and monEy marKEt dEposits, timE dEposit accounts of
lEss than $100,000, and othEr balancEs in rEtail monEy marKEt and
mutual funds.

monEy mEasurEs in thE EurozonE

thE EuropEan cEntral banK (Ecb) producEs thrEE mEasurEs of Euro
arEa monEy supply. thEnarrowEst is m1. m1 comprisEs notEs and coins
in circulation, plus all ovErnight dEposits. m2 is a broadEr dEfinition
of Euro arEa monEy that includEs m1, plus dEposits rEdEEmablE with
noticE up to thrEE months and dEposits with maturity up to two
yEars. finally, thE Euro arEa’s broadEst dEfinition of monEy is m3,
which includEs m2, plus rEpurchasE agrEEmEnts,monEy marKEt fund
units, and dEbt sEcuritiEs with up to two yEars maturity.
monEy mEasurEs in Japan
thE banK of Japan calculatEs thrEE mEasurEs of monEy. m1 is thE
narrowEst mEasurE and consists of cash currEncy in circulation.
m2 incorporatEs m1 but also includEs cErtificatEs of dEposit (cds).
thE broadEst mEasurE, m3, incorporatEs m2, plus dEposits hEld at
post officEs, as wEll as othEr savings and dEposits with financial
institutions. thErE is also a “broad mEasurE of liquidity” that
EncompassEs m3 as wEll as a rangE of othEr liquid assEts, such as
govErnmEnt bonds and commErcial papEr.

monEy mEasurEs in thE unitEd Kingdom

thE unitEd Kingdom producEs a sEt of four mEasurEs of thE monEy
stocK. m0 is thE narrowEst mEasurE and comprisEs notEs and coins
hEld outsidE thE banK of England, plus banKErs’ dEposits at thE banK
of England. m2 includEs m0, plus (EffEctivEly) all rEtail banK
dEposits. m4 includEs m2, plus wholEsalE banK and building sociEty
dEposits and also cErtificatEs of dEposit. finally, thE banK of
England producEs anothEr mEasurE callEd m3h, which is a mEasurE
crEatEd to bE comparablE with monEy dEfinitions in thE EuropEan
union. m3h includEs m4, plus u.K. rEsidEnts’ and corporations’
forEign currEncy dEposits in banKs and building sociEtiEs.
monEy mEasurEs in philippinEs
m1: narrow monEy
m1 includEs currEncy in circulation. It is thE basE mEasurEmEnt of
thE monEy supply and includEs cash in thE hands of thE public, both
bills and coins, plus pEso dEmand dEposits, tourists’ chEcKs from
non-banK issuErs, and othEr chEcKablE dEposits.[3] basically, thEsE
arE funds rEadily availablE for spEnding. adJustEd m1 is calculatEd
by summing all thE componEnts mEntionEd abovE
m2: broad monEy
this is tErmEd broad monEy bEcausE m2 includEs a broadEr sEt of
financial assEts hEld principally by housEholds.[2] this contains all
of m1 plus pEso saving dEposits (monEy marKEt dEposit accounts),
timE dEposits and balancEs in rEtail monEy marKEt mutual funds.
m3: broad monEy liabilitiEs
broad monEy liabilitiEs includE m2 plus monEy substitutEs such as
promissory notEs and commErcial papErs
m4: liquidity monEy
thEsE includE m3 plus transfErablE dEposits, trEasury bills and
dEposits hEld in forEign currEncy dEposits. almost all short-tErm,
highly liquid assEts will bE includEd in this mEasurE
Maureen Almarvez

tools for monetary policy

 Monetary Policy
monEtary policy is an
Economic policy that managEs
thE sizE and growth ratE of
thE monEy supply in an
Economy. It is a powErful tool
to rEgulatE macroEconomic
variablEs such as inflation
and unEmploymEnt.
Monetary Policy
 Tools for Monetary Control
1. opEn marKEt opErations
● thE most important monEtary
p o l i cy t o o l b E ca u s E t h E y a r E t h E
primary dEtErminants of changEs in
intErEst ratEs and thE monEtary basE,
thE main sourcE of fluctuations in
thE monEy supply.
●cEntral banK purchasEs and salEs of
sEcuritiEs in thE opEn marKEt as a way
to implEmEnt monEtary policy.
●this tool hElps to promotE stablE
pricEs and maximum EmploymEnt by
changing thE supply of rEsErvEs in
thE banKing systEm, which influEncEs
intErEst ratEs and thE supply of
crEdit.
 Tools for Monetary Control
2. dIscount ratE
● discount ratE sErvEs as
an important indicator of
thE condition of crEdit in
an Economy.
●affEcts thE monEy supply
by affEcting thE volumE of
discount loans and thE
monEtary basE.
● adJustmEnt of thE
discount ratE is considErEd
a tool to a rEcEssion or
inflation.
 Tools for Monetary Control
3. rEsErvE rEquIrEmEnt
● a cEntral banK rEgulation
that sEts minimum amount
that a commErcial banK
must hold in liquid assEts.
● changEs in rEsErvE
rEquirEmEnts affEct thE
monEy supply by causing thE
monEy supply multipliEr to
changE.
●it EnsurEs that it is ablE to
mEEt liabilitiEs in casE of
suddEn withdrawals.
Elizabeth Dullin

Effects of Monetary Policy

 Effects of Monetary Policy
monEtary policy impacts thE monEy supply in an
Economy, which influEncEs intErEst ratEs and thE
inflation ratE. It also impacts businEss Expansion, nEt
Exports, EmploymEnt, thE cost of dEbt, and thE
rElativE cost of consumption vErsus saving—all of
which dirEctly or indirEctly impact aggrEgatE dEmand.

cEntral banKs arE thE national authoritiEs

rEsponsiblE for providing currEncy and implEmEnting
monEtary policy. monEtary policy is a sEt of actions
through which thE monEtary authority dEtErminEs thE
conditions undEr which it suppliEs thE monEy that
circulatEs in thE Economy. monEtary policy thErEforE
has an EffEct on short-tErm intErEst ratEs.
 Effects of Monetary Policy
sEtting monEtary policy goals
has bEEn a dEfining issuE for
Economists and public opinion
sincE thE consolidation of
cEntral banKs as thE EntitiEs
rEsponsiblE for providing thE
EconomiEs with domEstic currEncy
and for implEmEnting monEtary
policy. parallEl with acadEmic
progrEss and ExpEriEncE in this
mattEr, thE undErstanding of
monEtary policy has advancEd
significantly ovEr thE last fEw
dEcadEs.
 Effects of Monetary Policy
In gEnEral tErms, cEntral banKs conduct monEtary policy
by affEcting thE conditions undEr which thEy satisfy thE
Economy’s liquidity nEEds. this stagE can bE dEfinEd as thE
first stagE of thE transmission mEchanism. thE monEtary
authority providEs liquidity to monEy marKEt participants
via changEs in somE itEms of thE cEntral banK balancE or
somE mEasurEs that can influEncE intErEst ratEs morE
dirEctly.

thE sEcond stagE of thE transmission mEchanism consists

of four channEls undEr which short-tErm intErEst ratEs
can influEncE aggrEgatE dEmand and supply and,
thErEforE, pricEs.
 Effects of Monetary Policy
a. IntErEst ratE channEl
mEdium and long-tErm intErEst ratEs dEpEnd, among othEr factors, on
ExpEctations for short-tErm intErEst ratEs in thE futurE.
b. crEdit channEl
whEn intErEst ratEs incrEasE, crEdit availablE for invEstmEnt and consumption
dEcrEasEs.
c. ExchangE ratE channEl
thE incrEasE in intErEst ratEs can maKE domEstic financial assEts morE
attractivE to invEstors than forEign financial assEts.
d. othEr assEt-pricE channEl
an intErEst ratE incrEasE tEnds to maKE bonds morE attractivE for invEstors
and rEducEs thE dEmand for Equity, maKing thE valuE of thEsE and othEr
assEts dEcrEasE.
E. ExpEctations channEl
monEtary policy dEcisions affEct ExpEctations for thE futurE pErformancE of
thE Economy and, in particular, of pricEs. Economic agEnts dEtErminE thEir
pricEs basEd on thEsE ExpEctations. Inflation ExpEctations affEct intErEst
ratEs and thEsE, in turn, affEct aggrEgatE supply and dEmand through thE
channEls mEntionEd prEviously.
 Thank you
for Listening
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ECONOMICS FOR INVESTMENT DECISION MAKERS (2013)