AE 322

FINANCIAL MARKETS
MODULE 2
MRS. CARAZELLI A. FURIGAY, MBA
MONEY: A UNIQUE FINANCIAL INSTRUMENT
MONEY
⮚ the set of liquid assets that are generally accepted in exchange for goods and
services.

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FUNCTIONS OF MONEY

MEDIUM OF EXCHANGE icon

icon UNIT OF ACCOUNT

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FUNCTIONS OF MONEY

STORE OF VALUE icon

icon MEANS OF DEFERRED PAYMENT

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FUNCTIONS OF MONEY

TRANSFER OF VALUE icon

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DEMAND AND SUPPLY OF MONEY

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FACTORS AFFECTING MONEY HOLDINGS

PRICE LEVEL icon

icon
NOMINAL INTEREST RATE OF
INVESTMENT ASSETS

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FACTORS AFFECTING MONEY HOLDINGS

REAL GDP icon

icon FINANCIAL INNOVATION

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MONEY SUPPLY

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 INTEREST RATES AND THE SUPPLY AND DEMAND OF MONEY
icon
DEMAND FOR MONEY
as interest rates rise, it becomes more
expensive to hold money
(opportunity cost due to lost
income), thus reducing the demand
for money.
icon
SUPPLY OF MONEY
⮚ the supply of money is determined by
the Central Bank and is therefore
Click icon to add picture fixed at any given point in time at the
level set by the Central Bank.
 
⮚ The following graph illustrates the
demand for and supply of money.
The intersection of the money
demand curve and the money supply
line determines the interest rate.
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MONEY
•   MARKET
• The Money Market: The equilibrium interest
rate is found where the demand for money
intersects the supply of money. The money supply
curve is vertical since the Central Bank controls
the supply of money (thus it is independent of the
interest rate). If the Central Bank increases the
money supply, interest rates will fall, as illustrated
by the fall in interest rates from I0 to I1.
 

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MONETARY POLICY
• is the use of the money supply to stabilize the
economy. The Central Bank uses monetary policy
to increase or decrease the money supply in an
effort to promote price stability and full
employment. Click icon to add picture

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THE CENTRAL BANK CONTROLS THE MONEY SUPPLY
THROUGH: OMO

• Increase in the Money Supply - • Decrease in the Money Supply -

When the Fed purchases
government securities, it increases
the money supply (i.e., puts money
into circulation to pay for the
securities).
When the Fed sells government
securities, it decreases the money
supply (i.e., takes money out of
circulation).

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CHANGES IN THE DISCOUNT RATE

Member banks may borrow

money from the Fed to cover
liquidity needs, increase reserves,
or make investments. Click icon to add picture
 
Raising the discount rate
discourages borrowing by
member banks and decreases the
money supply.
 
Lowering the discount rate
encourages borrowing by member
banks and increases the money
supply.

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CHANGES IN THE REQUIRED RESERVE
RATIO (RRR)

a. Raising the reserve

requirement
decreases the money
supply. Click icon to add picture
b. Lowering the reserve
requirement increases
the money supply.

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MONETARY POLICY AND ITS EFFECTS

Click icon to add picture

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 BSP
MONETARY POLICY
VIDEO
Click icon to add picture PRESENTATIONS

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THANK YOU!