Jean Lee C. Patindol

The Circular Flow of Expenditure and Income

Jean Lee C. Patindol

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

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

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

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

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

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

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Jean Lee C. Patindol

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

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