Presentation 1 not necessarily derived from the materials used to

INTRODUCTION TO MONEY, CREDIT, AND BANKING. produce the note or coin. This is money's primary

FINANCE AND FINANCIAL MANAGEMENT function: a generally recognized medium of

Finance is always of great importance, be it in exchange that people and global economies intend

a business or in one's everyday life. It is to hold, and are willing to accept as payment for

important to manage risks in business, it is equally current or future transactions.

important to manage risks in life as well. Risk is HISTORY OF MONEY.

nothing but an uncertain event that might I. BARTERING.

damage your assets and when it is financial risks, it Direct exchange of commodities

creates loss of Finance. Some books define Finance II. 770 B.C

as the science and art of managing money. Chinese transitioned from using actual useful goods–
such as tools and weapons–as a medium of

Financial Management deals with that exchange to using small bronze copies of these same

decisions that are supposed to maximize the objects.

value of shareholder’s wealth (Cayanan). These III. 700 B.C

decisions will ultimately affect the markets Chinese moved from coins to paper money. This

perception of the company and influence the paper money could be used to buy goods and

share price. services. In this way, it operated much like currency

does today in the modern world. However, it was

The goal of Financial Management is to issued by banks and private institutions, not the

maximize the value of shares of stocks. Managers government, which is now responsible for issuing

of a corporation are responsible for making the currency in most countries.

decisions for the company that would lead towards IV. SHIFT TO PAPER MONEY.

shareholder’s wealth maximization. Banks and the ruling classes started buying

MONEY currencies from other nations and created the first

Money is an economic unit that functions as a currency market

generally recognized medium of exchange for V. MOBILE PAYMENTS.

transactional purposes in an economy. Money Mobile payments are payments made for goods or

provides the service of reducing transaction cost, services using a portable electronic device such as a

namely the double coincidence of wants. Money cell phone, smartphone, or tablet.

originates in the form of a commodity, having a VI. VIRTUAL CURRENCY.

physical property to be adopted by market The attractiveness of virtual currency is that it

participants as a medium of exchange. promises reduced transaction costs than standard

Money can be: online payment systems, and virtual currencies,

 market-determined, unlike government-issued currencies, are managed

 officially issued legal tender or fiat moneys, by a decentralized authority

 money substitutes and fiduciary media, MONEY SUPPLY.

 and electronic cryptocurrencies. Governments print paper money and coins through a

Money is a liquid asset used in the settlement of mix of central banks and treasuries. Bank regulators

transactions. It functions based on the general influence the amount of money accessible to the

acceptance of its value within a governmental public through requiring banks to keep reserves,

economy and internationally through foreign regulating how credit is extended, and other means.

exchange. The current value of monetary currency is

Economists study the money supply and devise But in reality, money is nothing more than a medium
policies based on it, such as regulating interest rates of exchange. Money makes it easier to trade your
and raising or reducing the quantity of money labor for a diverse set of goods and services. The
moving through the economy. Because of the following are some things to consider when it comes
potential effects of the money supply on the price to the value of money and why money is important.
level, inflation, and the business cycle, public and GOALS OF THE ECONOMY.
private sector study is carried out. Monetary policy is an economic policy that governs
EFFECT OF MONEY SUPPLY ON THE ECONOMY. the amount and pace of expansion of an economy's
An increase in the supply of money generally money supply. It is an effective technique for
decreases interest rates, which leads to greater controlling macroeconomic factors such as inflation
investment and more money in the hands of and unemployment. These policies are executed
consumers, encouraging spending. Businesses through a variety of methods, including interest rate
respond by boosting output and ordering additional adjustments, the purchase or sale of government
raw materials. Increased economic activity increases assets, and changes in the quantity of currency in
demand for workers. If the money supply declines or circulation.
its growth rate slows, the reverse can happen. CREDIT, AND BANKING.
HOW MONEY SUPPLY IS MEASURED. Credit also may refer to the creditworthiness
According to the kind and size of the account in or credit history of an individual or a company. To an
which the instrument is held, the various forms of accountant, it refers to a bookkeeping entry that
money in the money supply are typically categorized either decreases assets or increases liabilities and
as M’s, such as M0, M1, M2, and M3. equity on a company's balance sheet.

Not all classifications are commonly used, and Credit refers to the quantity of money a person or
various classifications may be used in different corporation has available to borrow, as well as their
countries. The money supply represents the many creditworthiness. "They have fantastic credit, so they
forms of liquidity available in the economy for each aren't concerned about the bank rejecting their
type of money. It is divided into sections mortgage application," for example.

M1, for example, is also known as narrow money Banks and financial organizations profit from the
and comprises coins and notes in circulation as well capital they lend to their customers. These funds are
as other money equivalents that may be quickly derived from monies that clients deposit in checking
changed to cash. and savings accounts or invest in specific investment
M2 include M1 as well as short-term time deposits in vehicles such as certificates of deposit (CDs). Banks
banks and some money market funds. pay clients a modest amount of interest on their
M3 comprises M2 as well as long-term deposits. deposits in exchange for using their services. As
IMPORTANCE OF MONEY. previously stated, this money is then loaned out to
Money is a Universal Medium of Exchange. One others and is known as Bank Credit.
reason so many people profess not to care about
money is that the love of money has been described
Presentation 2
as “the root of all evil.” It’s true, materialistic people
ROLE AND USES OF MONEY.
can let an obsession with money drive them to do
FUNCTIONS OF MONEY.
bad things for their own financial gain
1. Medium of Exchange
2. Unit of Account
3. Store of Value Currency in circulation is all of the money that has
4. Standard of Deferred Payments. been issued by a country's monetary authority,
5. Transfer of Value minus cash that has been removed from the system.
CONTINGENT FUNCTIONS. Currency in circulation represents part of the
1) Calculation of National Income/National Income overall money supply, with a portion of the overall
Accounting. supply being stored in checking and savings
2) Maximization of Satisfaction. accounts.
3) Basis of Credit.
4) Liquidity of Wealth
KINDS OF MONEY.
Commodity Money
 In the Barter System, various commodities were
used as the medium of exchange.
 Goods or commodities were exchanged in terms
MONEY SUPPLY.
of goods or commodities.
An increase in the supply of money typically lowers
Metallic Money
interest rates, which in turn, generates
 Money made up of metals, like Gold, Silver,
more investment and puts more money in the hands
Copper, and Iron.
of consumers, thereby stimulating spending.
 It is in form of monometallic and Bimetallic.
Businesses respond by ordering more raw materials
 Monometallic is made without mixture of metal.
and increasing production. The increased business
 Bimetallic is composed of mixture of gold and
activity raises the demand for labor. The opposite
silver.
can occur if the money supply falls or when its
Paper Money
growth rate declines.
 Made up of paper.
 The face value of paper money is more than its Presentation 3
intrinsic value. Monetary Policy

ROLE OF MONEY. Monetary policy is an economic policy that

In production, Money facilities production by manages the size and growth rate of the money

stimulating savings and investment. supply in an economy. It is a powerful tool to

In Distribution, Money plays an important role in regulate macroeconomic variables such

the field of distribution of national income as wage, as inflation and unemployment.

rent and interest. These policies are implemented through different

In Consumption, Money enables a consumer to tools, including the adjustment of the interest rates,

maximize his satisfaction purchase or sale of government securities, and

In Exchange, Money possess the purchasing power changing the amount of cash circulating in the

and serves as a medium of exchange. economy. The central bank or a similar regulatory

Public Finance, Government receives revenue such organization is responsible for formulating these

as taxes, fines, etc in the form of money policies.

Money Circulation. Monetary Policy in the Philippines.

Currency in circulation refers to the amount of Measures or actions taken by the BSP to regulate the

cash–in the form of paper notes or coins–within a supply of money in the economy.

country that is physically used to conduct

transactions between consumers and businesses.
Actions of the BSP are aimed at influencing the
timing, cost and availability of money and credit, as
well as other financial factors, for the purpose of
stabilizing the price level

If the BSP believes that money supply is in excess of

a desired level, then it can take action to reduce the
money supply. This is referred to as
Contractionary Monetary Policy.
3. Economic Growth
If based on the BSP’s assessment—the liquidity  Monetary policy can be imposed to influence the
situation is tight and there is a need to increase rapid economic growth. Economic growth is
money supply, it implements an Expansionary defined as “the process whereby the real per
Monetary Policy. capita income of a country increases over a long
OBJECTIVES AND GOALS OF MONETARY POLICY. period of time “it is measured by the increase in
1. Full Employment the amount of goods and services produced in a
One of the objectives of monetary policy is attain full country.
employment. It is not only because unemployment  A growing economy produces more goods and
leads to wastage of potential output, but also services in each successive time period. Thus,
because of the loss of social standing and self- growth occurs when an economy’s thus,
respect. It also breeds poverty. economic growth implies raising the standard of
2. Price Stability living of the people and reducing inequalities of
To stabilize the price level. Both , rising and falling income distribution.
prices are bad as the bring unnecessary loss to some 4. Balance of Payment
and undue advantage to others. They are associated Another objective of monetary policy since the 1950s
with business cycles. price stability keeps the value has been to maintain equilibrium in the balance of
of money stable, eliminates cyclical fluctuations. payments. It is also recognized that deficit in the
Brings economic stability, helps in reducing balance of payments will retard the attainment of
inequalities of income and wealth, secures social other objectives. This is because a deficit in the
justice and promotes economic welfare balance of payment leads to a sizeable outflow of
gold,
5. Interest Rates.
 High interest rate in an underdeveloped country
acts as an incentive to higher savings develops
banking habits and speeds up the monetization
of the economy which are essential for capital
formation and economic growth.
 High interest rate policy is anti inflationary in
nature, for it discourages borrowing and
investment for speculative purpose, and in
foreign currencies
 Commercial banks can’t use the reserves to make
6. Consumer Price Index loans or fund investments into new businesses. Since
 The CPI represents the average price of a it constitutes a lost opportunity for the commercial
standard basket of goods and services banks, central banks pay them interest on the
consumed by a typical Filipino family for a given reserves. The interest is known as IOR or IORR
period. (interest on reserves or interest on required
 This standard basket contains hundreds of reserves).
consumption items (such as food products, Open market operations
clothing, water and electricity) whose price The central bank can either purchase or sell
movements are monitored to determine the securities issued by the government to affect the
change in the CPI, or the level of inflation. money supply. For example, central banks can
purchase government bonds. As a result, banks will
 The National Statistics Office (NSO) calculates obtain more money to increase the lending and
and announces the monthly CPI and the rate of money supply in the economy.
inflation based on a nationwide monthly survey Expansionary vs. Contractionary Monetary Policy
of prices for a given basket of commodities. The Expansionary Monetary Policy
NSO also determines the composition of the CPI This is a monetary policy that aims to increase the
basket through surveys that are conducted money supply in the economy by decreasing interest
periodically. rates, purchasing government securities by central
Tools of Monetary Policy. banks, and lowering the reserve requirements for
Interest rate adjustment banks.
A central bank can influence interest rates by
changing the discount rate. The discount rate (base An expansionary policy lowers unemployment and
rate) is an interest rate charged by a central bank to stimulates business activities and consumer spending.
banks for short-term loans. The overall goal of the expansionary monetary policy
is to fuel economic growth. However, it can also
For example, if a central bank increases the discount possibly lead to higher inflation.
rate, the cost of borrowing for the banks increases. Contractionary Monetary Policy
Subsequently, the banks will increase the interest The goal of a contractionary monetary policy is to
rate they charge their customers. Thus, the cost of decrease the money supply in the economy. It can
borrowing in the economy will increase, and the be achieved by raising interest rates, selling
money supply will decrease. government bonds, and increasing the reserve
Change reserve requirements requirements for banks. The contractionary policy is
Central banks usually set up the minimum amount of utilized when the government wants to control
reserves that must be held by a commercial bank. By inflation levels.
changing the required amount, the central bank can
influence the money supply in the economy. If Presentation 4
monetary authorities increase the required reserve MONEY AND INFLATION
amount, commercial banks find less money available Inflation can happen if the money supply grows
to lend to their clients and thus, money supply faster than the economic output under otherwise
decreases. normal economic circumstances. Inflation, or the
rate at which the average price of goods or serves
increases over time, can also be affected by factors With more money available to individuals, positive
beyond the money supply. consumer sentiment leads to higher spending, and
Demand for Money this increased demand pulls prices higher. It creates
Transaction Motive: a demand-supply gap with higher demand and less
 Consumers need money to meet their day to day flexible supply, which results in higher prices.
needs Cost-Push Effect
 producers need money to make investments. Cost-push inflation is a result of the increase in
Precautionary Motive: prices working through the production process inputs.
 To cover for unforeseen events such as sickness, When additions to the supply of money and credit
accidents and losses, money is kept as are channeled into a commodity or other asset
precaution for contingency. markets and especially when this is accompanied by
Speculative Motive: a negative economic shock to the supply of key
 For making gains from speculation on future commodities, costs for all kinds of intermediate
value of bonds and securities. goods rise.
Inflation is the decline of purchasing power of a
given currency over time. A quantitative estimate of These developments lead to higher costs for the
the rate at which the decline in purchasing power finished product or service and work their way into
occurs can be reflected in the increase of an rising consumer prices. For instance, when the
average price level of a basket of selected goods and expansion of the money supply creates a speculative
services in an economy over some period of time. boom in oil prices the cost of energy of all sorts of
The rise in the general level of prices, often uses can rise and contribute to rising consumer
expressed as a percentage, means that a unit of prices, which is reflected in various measures of
currency effectively buys less than it did in prior inflation.
periods. Built-in Inflation
Causes of inflation. Built-in inflation is related to adaptive expectations,
An increase in the supply of money is the root of the idea that people expect current inflation rates to
inflation, though this can play out through different continue in the future. As the price of goods and
mechanisms in the economy. Money supply can be services rises, workers and others come to expect
increased by the monetary authorities either by that they will continue to rise in the future at a
printing and giving away more money to the similar rate and demand more costs or wages to
individuals, by legally devaluing (reducing the value maintain their standard of living. Their increased
of) the legal tender currency, more (most commonly) wages result in higher cost of goods and services,
by loaning new money into existence as reserve and this wage-price spiral continues as one factor
account credits through the banking system by induces the other and vice-versa.
purchasing government bonds from banks on the
secondary market.
Demand-Pull Effect
Demand-pull inflation occurs when an increase in the
supply of money and credit stimulates overall
demand for goods and services in an economy to
increase more rapidly than the economy's production
capacity. This increases demand and leads to price
rises.
PRO’S AND CONS OF INFLATION. The primary objective of the BSP's monetary policy is
Inflation can be construed as either a good or a bad “to promote price stability conducive to a balanced
thing, depending upon which side one takes, and and sustainable growth of the economy” (Republic
how rapidly the change occurs. Act 7653). The adoption of inflation targeting
framework of monetary policy in January 2002 is
For example, individuals with tangible assets that aimed at achieving this objective.
are priced in currency, like property or stocked
commodities, may like to see some inflation as that Inflation targeting is focused mainly on achieving a
raises the price of their assets, which they can sell at low and stable inflation, supportive of the economy’s
a higher rate. growth objective. This approach entails the
announcement of an explicit inflation target that the
However, the buyers of such assets may not be BSP promises to achieve over a given time period.
happy with inflation, as they will be required to shell
out more money. Inflation-indexed bonds are To achieve the inflation target, the BSP uses a suite
another popular option for investors to profit from of monetary policy instruments in implementing the
inflation. desired monetary policy stance, depending on its
assessment of the outlook for inflation. If the BSP
On the other hand, people holding perceives the inflation forecast to exceed the target,
assets denominated in currency, such as cash or then it implements contractionary monetary policy to
bonds, may also not like inflation, as it erodes the bring down inflation to its target path. On the other
real value of their holdings. Investors looking hand, if the BSP sees the inflation forecast to be
to protect their portfolios from inflation should lower than the target or there is need to increase
consider inflation-hedged asset classes, such as gold, liquidity in the financial system, then it can
commodities, and real estate investment trusts implement expansionary monetary policy. The
(REITs). reverse repurchase (RRP) or borrowing rate is the
CONTROLLING INFLATION. primary monetary policy instrument of the BSP.
A country’s financial regulator shoulders the Is inflation good or bad?
important responsibility of keeping inflation in check. Too much inflation is generally considered bad for an
It is done by implementing measures economy, while too little inflation is also considered
through monetary policy, which refers to the actions harmful. Many economists advocate for a middle-
of a central bank or other committees that determine ground of low to moderate inflation, of around 2%
the size and rate of growth of the money supply. per year.
Generally speaking, higher inflation harms savers
In the Philippines., the Banko Sentral ng because it erodes the purchasing power of the
Pilipinas’ monetary policy goals include moderate money they have saved. However, it can benefit
long-term interest rates, price stability, and borrowers because the inflation-adjusted value of
maximum employment, and each of these goals is their outstanding debts shrinks over time.
intended to promote a stable financial What are the effects of inflation?
environment. The Banko Sentral ng Pilipinas clearly Inflation can affect the economy in several ways. For
communicates long-term inflation goals in order to example, if inflation causes a nation’s currency to
keep a steady long-term rate of inflation, which is decline, this can benefit exporters by making their
thought to be beneficial to the economy. goods more affordable when priced in the currency
of foreign nations.
On the other hand, this could harm importers by
making foreign-made goods more expensive. Higher
inflation can also encourage spending, as consumers
will aim to purchase goods quickly before their prices
rise further. Savers, on the other hand, could see the
real value of their savings erode, limiting their ability
to spend or invest in the future.