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Chapter 10

This document discusses monetary policies and the role of money and central banks. It covers: 1) Money serves as a medium of exchange and its supply consists of coins, bills, and deposits. Velocity and income are related through the quantity theory of money. 2) Commercial banks create money through fractional-reserve banking, with the money multiplier determining how much can be created from reserves. 3) The central bank administers monetary policy to achieve stability and economic growth through tools like reserve requirements and open market operations that influence money supply.

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MA Valdez
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47 views

Chapter 10

This document discusses monetary policies and the role of money and central banks. It covers: 1) Money serves as a medium of exchange and its supply consists of coins, bills, and deposits. Velocity and income are related through the quantity theory of money. 2) Commercial banks create money through fractional-reserve banking, with the money multiplier determining how much can be created from reserves. 3) The central bank administers monetary policy to achieve stability and economic growth through tools like reserve requirements and open market operations that influence money supply.

Uploaded by

MA Valdez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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MONEY AND MONETY

POLICIES
A. FUNCTION OF MONEY AND MONEY
SUPPLY
Money as a medium of
exchange to assume a significant
role in the advent of the market
economy marked by
specialization,
interdependence, and trade.
2 MONEY SUPPLY
Money is a vehicle of economic activities when in circulation. The stock of
money serving this function is called money supply and consists of the
following :
coins and bills in circulation
demand deposit in banks
quasi money
savings deposits
time deposits
deposit substitute
Demand deposits in commercial banks are intended for spending and
circulated through the use of checks which are as good as money.Quasi-
money consists of savings and time deposits in commercial banks while
deposit substitutes are deposits in savings banks, savings and loans
associations, and even in creditunions.These two instruments are also
components of money supply as they serve to meet short-run transactions
during these times of inflation and rapid economic growth.
3 MONEY VELOCITY AND INCOME

Money supply as a medium of exchange multiplies into income.Income determination as


discussed in the earlier chapters, the multiplier coefficient is only dependent on the rate of
money outflow.The greater is this propensity, the more money the economy holds
temporarily as idle balances which can otherwise be generated into more transactions and
income if circulated faster.the opposite is true if this propensity is less to increase money
circulation.The two main determinants embody the wider concept of the multiplier process
called the “money velocity.” Multiplying this coefficient by money supply yields income, as
follows:
MV=Y
Alternatively:
MV=PQ
Where:
M = Money supply
V = Velocity
Y = Nominal money income
P = Price
Q = Volume of goods and services
The equation embodies the quantity theory of money and implies that the same level of
money supply increase income due to an increase in the money velocity.Institutional
factors may cause money velocity to change like paying labor daily instead of bi-monthly
increases this coefficient.Workers would temporarily hold less money as idle balances and
firms would turnover more money to generate more transactions and income, at any one
time.
B. BANKS AND MONEY SUPPLY

1. The fractional reserve system


Banks are suppose to be coduits of funds linking investors borrowers
to the sources. As such they accept deposits which chiefly supply
their lending operations. They are liable to the depositors and
borrowers for the money on demand in the same manner as the
borrower s in turn for periodic loans repayments.
Commecials in particular can creat deposit liabilities greater than
their reservers of money in the vault which is the essence of the
fractional reserve system.
2. Money creation

It has been illustrated that the fractional reserve system enables


commercial banks to lend more than their reserves.
The amount of money checks that a commercial bank can cause to
circulate from every peso of reserves is theoretically expressed as follows:
L=Mr
m=L/R
Since r = R/L<1
Therefore m= 1/r
Where : m= MONEY MULTIPLIER
R= RESERVES
L= DEPOSITE LIABILITY
r= RATIO OF RESERVES TO DEPOSITS LIABILITIES OR
FRACTIONAL CASH DEMAND RATIO
C. SOURCE OF MONEY SUPPLY

The lending operation of the banking system determines the volume of money
checks it creates.
Prints new money to help financial its expanding operation. This increases
currency in circulation and the money checks that create from currency
deposits.
Net effect of foreighn currency inflows and out flows that changes the level of
money supply. the level increases the inflows and out flows whi;e the opposites
is true when outflows exceeds the inflows.
Taxes also change the level of money supply as leakages from the circular flow.
Taxes are foregone consumption and savings which could otherwise be part of
currency in circulation.
D: money and the central bank

1. FUNCTION OF THE CENTRAL BANK


It is the responcibility of the banko central to administer the monetary
banking and credit system of the republic as embobied in the sec. 2
articles of the amended republic act 2656. this resposibility is exercise to
achieve monetary objectives in consonance with the overall economic
policies of the government. The objectives are as follows:
1. to maintain internal and external monetary stability in the
philippines.
2. to foster monetary, credit, and exchange conditions conducive to
a balanced sustainable growth of the economy.
2. THE CONFIDENCE ON MONEY
The central bank is the only authorized government entity to print money
and is resposible for the proper administration of the money, banking
and credit system of yhe republic to achieve monetary stability and
create conditions conducive to economic developments.
E. MONETARY POLICIES

1. SOME POLICY CONCEPTS


The central banks used monetary policies to regulate money throught the
credit and banking system in order to attain monetary stability
conducive to economic development. How ever the instruments also
take sometime to induce economic forces and are therefore, inflexible.
2. SHORT-RUN TOOLS AFFECTING MONEY SUPPLY
A. Reserves requiremenys
It has been explained in section b.2 of this chapter that
commercial banks can lend more of there actual deposites
and creates money by creating more deposites liabilities

MONEY CREATES =1/r (R)


FRAMEWORK
the central bank can infuse money into the coffers of the banking
system by the buying of its loan papers at rediscounted values
COMPARATIVE ADVANTAGE

THE CENTRAL BANK has the control of the bank reserver with the
instrument. The central bank can offer to buy back these bills giving
securitiy holders attractive interest earnings for the perod covered.

EFFECTIVENESS IN TRIMMING LIQUIDITY


the effectiveness of the open market operations was put to a test in
1984 when the monetary instrument to help mop up excess money and
contain inflaion.

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