Zamboanga City State Polytechnic College

R.T Lim Blvd Baliwasan., Zamboanga City

COLLEGE OF TEACHER EDUCATION

Discussants:Dominic B. Acampado
Dominiel N. Sinahon
Adrian G. Pelito
Edcel B. Vicencio jr.
May Anne L. Pagador
Niko Jay L. Rojas

Subject: SOC. SCI 111 ( Economics with Principles of Taxation and Agrarian
Reform)

Date: December 9, 2020

Teacher: Ms. Regine D. Econg

Topic: Money and Monetary Policy

Outline of the topic

I. Money and Its Important

A. What is Money
B. Funtions of Money

II. Money Supply and Demand

A. Importance of Money Supply
- Composition of Money Supply(Philippine Setting)
- Philippine Financial System
B. Demand of Money

III. Monetary Policy

A. Objective
B. Instument
C. Philippine Philippine Monetary Instument Classification
Money and Monetary Policy
WHAT IS MONEY
money is fundamental in the functioning of the economy. It facilitates the exchange of goods
and service and reduces the amount of time and effort to carry out a trade transaction.
FUNCTIONS OF MONEY
1. Medium of exchange
The exchange of goods and services in markets is among the most universal activities of human life.
To facilitate these exchanges, people settle on something that will serve as a medium of exchange—
they select something to be money.
2. Unit of account
Money serves as a unit of account, which is a consistent means of measuring the value of things. We
use money in this fashion because it is also a medium of exchange. When we report the value of a
good or service in units of money, we are reporting what another person is likely to have to pay to
obtain that good or service.
3. Store of value
The third function of money is to serve as a store of value, that is, an item that holds value over
time. Consider a 1000-peso bill that you accidentally left in a coat pocket a year ago. When you find it,
you will be pleased. That is because you know the bill still has value. Value has, in effect, been
storedin that little piece of paper.

4. Standard for deferred payments

Money can be used to transfer value for exchange use at different times between people through
the tools of credit and debt. One person can loan a quantity of money to another for a period of time
to use, and repay another agreed-upon quantity of money at a future date.

Money Supply and Demand

Money Supply- in the Philippines, money supply is manage by Basko Sentral ng

Pilipinas(BSP)
- money supply is backup with gold reserves.
Fiat money - a currency established as money, often by government regulation,
that
does not have intrinsic value.
- Fiat money does not have use value, and has value only because a
government maintains its value, or because parties engaging in
exchange agree on its value.

Composition of Money Supply

1. M1 or narrow money- compose of currency like coins and paper bills

2. M2 or broad money- compose of quasi money deposit like savings account and
time
deposit.
3. M3 or total liquidity- compose of diposit substitute like promisory note and
comercial
paper.
4. M4 - compose of currency deposits of non-bank residence.
Effects of Money Supply

1. Inflation- a general rise in the price level in an economy over a period of time, resulting in a
sustained drop in the purchasing power of money.

2. Deflation- a general decline in prices for goods and services, typically associated with a contraction
in the supply of money and credit in the economy. During deflation, the purchasing power of currency
rises over time.

Philippine Financial System

The Philippine Financial System consists of three major groups of Institutions involved in the
mobilization and intermediation of private savings as well as allocation of financial resources. These
institutions includes:
1. Bangko Sentral ng Pilipinas (BSP)
- Bangko Sentral ng Pilipinas (BSP) was created in 1993, replacing the earlier Central Bank of the
Philippines which began operations in 1949.
- The primary mandate of the BSP is to maintain price stability conducive to a balanced and
sustainable economic growth.

2. Banking System- The Philippine Banking System consists of duly licensed and registered banking
entities engaged in the lending of funds obtained in the form of deposits.
- These institutions includes Universal Banks, Commercial Banks, Thrift Banks, Rural Banks,
Cooperative Banks, and Islamic Banks.

3. Non-Bank Financial Institutions- No-Bank Financial Institutions (NBFIs) refer to all Financial
Institution other than banks engaged principally in the provisions of a wide range of financial services
which include those performed by pawnshops, lending investor, stock brokers, money brokers,
investment houses, financing companies, insurance companies, and intermediaries performing quasi
banking functions.

MONETARY POLICY

Monetary policy is an instrument which effect the credit flow in an economy.

The variation effect the demand & supply of credit in an economy, and the level or nature of economic
activities.

Objective
 Stability in price level
 Economic development
 Arrangement of full employment
 Expansion of credit facility
 Equality & Justice
 Stability in exchange rate

INSTRUMENTS

GENERAL (QUANTITATIVE) Methods

-These methods help in credit control in the economy.

Affect total quantity of the credit.

 Bank rate policy
 Open market policy
  Cash reserve ratio
 Statuary reserve ratio
Bank Rate policy
Traditional approach:- Bank rate means on which central bank discounts and rediscount the eligible
bills.
Today’s approach:- Bank rate means the minimum rate on which central bank provides financial
accommodation to commercial bank in the discharge of its function as the lender of the last resort.

Effect of Bank rate

Increase in bank rate
 Increase in bank rate charge by the central bank on its advance to commercial bank.
 Commercial bank increase the rate of interest on their loan.
 Demand for the credits and loan decrease.
 Flow of the money decrease in the economy
 Use in inflationary situation
Decrease in bank rate
 Decrease in bank rate charge by the central bank on its advance to commercial bank.
 Commercial bank decrease the rate of interest on their loan.
 Demand for the credits and loan increase.
 Flow of the money increase in the economy
 Use in depression situation
Open Market operation
Its include the sales and purchase by the central bank of ….
 Assets
 Foreign exchange
 Gold
 Government securities
 Company securities
Use of Open Market operation
In the inflationary situation
 Central bank sell out the securities to commercial bank and control money supply.
 Central bank decrease the money supply.
In the depressionary situation
 Central bank purchase the securities from the commercial bank.
 Central bank increase the money supply.
Cash Reserve Ratio
 Commercial bank has to keep a certain percentage of its total deposits with central bank.
 It control the cash flow in economy.
 It keeps changing in monetary policy framed by central bank of a country.
STATUARY LIQUIDITY RATIO
 Commercial bank is to keep a certain percentage of its total deposits as liquid asset.
 It control the cash flow in economy.
 It keeps changing in monetary policy framed by central bank of a country.
Use of C.R.R. & S.L.R
In Inflationary situation
o Increased the percentage of cash reserve ratio and Statutory liquidity ratio
o It reduces the supply of money in an economy
In Depressionary situation
o Decreased the percentage of cash reserve ratio and Statutory liquidity ratio
o It increases the supply of money in an economy
Function of credit regulation the quantitative methods
For expansion of credit
 Reduce the bank rate
 Purchase of securities
 Reduce the C.R.R.
 Reduce the S.L.R.
For contraction of credit
 Increase the bank rate
 sales of securities
 Increase the C.R.R.
 Increase the S.L.R.
Specific or qualitative Credit Control
 Adopt for expansion and contraction of credit to attain specific objective.
Methods of qualitative credit control
• Credit rationing
• Change in margin
• Direct action

In the Philippines, monetary policy instruments are classified into:

 Open Market Operations (OMO)
 Rediscounting
 Reserve Requirement
 Direct Controls
 Moral Suasion
Open Market Operations (OMO)
It involves the buying and selling of government securities from banks and financial institutions of
the BSP in order to expand or contract the supply of money.

Rediscounting
This refers to transactions whereby the BSP extends credit to a bank collateralized by its loan papers
with customers.
This Instrument plays a dual role; as a tool to allocate credit to preferred sectors of the economy and
as an instrument to influence the supply of money and credit.
Rediscounting Rate is the interest rate charged by the BSP to the banks that borrow from them.

Reserve Requirement
This is the minimum amount of reserves that bank must hold against deposits.
The reserve requirements which are held by banks as cash in their vaults and deposits with the BSP,
help to control the money and credit by affecting the demand for money reserves and the money
multiplier.
It serves as a prudential safeguard for depositors.

Direct Controls
This consist of quantitative and qualitative limits on the ability of banks to undertake certain
activities.
The most common type of direct controls include limitations on aggregate bank lending, selective
limitations on certain types of banks lending and interest rate regulations.

Moral Suasion
The BSP persuade banks to make their lending policies responsive to the needs of the economy.
Banks must tighten their credit programs in times of inflation and loosen them in times of recession.