KYLA R.

DAYAWON BSA-2A
FINANCIAL MARKETS AND INSTITUTION

REVIEW QUESTIONS (CHAPTER 2)

1. Describe what money is.
- Money is said to be the item or commodity that is generally accepted as a means of payment for
goods and services or for repayment of debt, and that serves as an asset to its holder. On the simplest
level, money is composed of the bills and coins which have been printed or minted by the National
Government (these are called currency). But money also includes funds stored as electronic entries
in one’s checking account and savings account.

2. Explain briefly the significant of money in the economy of the country.

- Money serves as “oil that keeps the machinery of our world turning” wherein by giving goods and
services an easily measured value, money facilitates the billions of transactions that takes place
every day. Without it, the industry and trade that form the basis of modern economies would grind
to the halt and the flow of wealth around the world would cease.

3. Briefly describe each of the four main function of money.

Store of Value- Money acts as a means by which people can store their wealth for future use. It
must not, therefore perishable, and it helps if it is of practical size that can be stores and transported
easily.

Item of worth- most money originally has an intrinsic value, such as that the precious metal that
was used to make the coin. This in itself acted as some guarantee the coin would be accepted.

Means of Exchange- it must be possible to exchange money freely and widely for goods and its
value should be as stable as possible. It helps if that value is easily divisible and if there are
sufficient denominations and so change can be given.

Unit of Account- Money can be used to record wealth possessed, traded or spent personally and
nationally. It helps if only one recognized authority issues money. If anybody could issue it, then
trust in its value would disappear.

4. Describe the history of money in the Philippines.

Pre Spanish regime, prior to coming of the Spanish in 1521 Philippines was already trading with
neighbouring country such as China, Java, and Macau. Some were circulating in the Philippines as
early as the 8th century through the prevailing medium of exchange was barter. Commodity money
such as gold, gold dust, silver wires, coffee, sugar rice, spices, carabao were used as money.
Penniform gold barter ring were used by foreign merchants between the 8 th Century and 14th
century. Piloncitos and other commodities were also in the circulation.
Spanish Regime, this is where the Spanish introduced coins in the Philippine when they colonized
the country in 1521. Silver coins minted in Mexico were predominantly used in 1861, established
in order to standardize coinage.
During American Regime, after the independence in 1898, the country’s first local currency, the
Philippine peso was introduced replacing the Spanish-Filipino Peso.
Japanese Regime, Philippines was occupied by Japan during worldwide II, Japanese issued
Japanese war notes. There bills has no reserves nor backed up by any government asset and were
called “mickey mouse money.
Post war period when all the Japanese currencies circulating in the Philippines were declared
illegal, all banks were closed and all Philippine bank notes were withdrawn from circulation. New
treasury certificate called victory money were printed in P 500, P 200, P 100, P 20, P 10, P 2 and
P1 denominations with the establishments of central banks. In 1949, a new currency called “Central
Bank Notes” was issued.
In 2010, central banks launched “the new generation currency”, significant event in the Philippine
History, Iconic Buildings and heritage sites were featured.
In 2018, new generation currency coin series were put in circulation.
5. Explain briefly how money facilitates the flow of resources in macroeconomy.
- Money facilitates the flow of resources in the circular model of macroeconomy, wherein not enough
money will slow down the economy and too much money can cause inflation because of higher
price levels. Monitoring the supply and demand for money is vital for the economy’s central bank’s
monetary policy, which aims to stabilize price levels and to support economic growth.

6. Enumerate and describe the sources of demand for money.

TRANSACTION DEMAND. Money demanded for day-to-day payments through balances held
by households and firms (instead of stocks, bonds, or other assets). The kind demand varies with
GDP: it does not depend on the rate of interest.

PRECAUTIONARY DEMANDS. Money demanded as a result of unanticipated payments. This

kind of demand varies on GDP.

SPECULATIVE DEMAND. Money demanded because of expectations about the interest rates in
the future. This means that people will decide to expand their money balances and hold off on bond
purchases if they expect interest rates to rise. This kind of demend has a negative relationship with
the interest rates.

7. When is an asset suitable for medium of exchange?

For an asset to be suitable for medium of exchange:

 It must be accepted (so all transactions can be made in terms of it).

 Recognized easily as money (so people can perform transactions easily and quickly.
 Divisible (so people can provide change).
 Difficult to counterfeit (so people will not print their own money).

8. Why are economist and policy makers interested in measuring money?

Economist and policy makers are interested in measuring money because they use it whether the
economy is growing or experiencing a recession as well as to evaluate economic health and set the
target rates in an economy.

9. Explain whether you agree with this assertion:

“It is not possible for the total value of production to increase unless the money supply also increases. After
all, how can the value of the goods and services being bought and sold increase unless there is more money
available”
I agree with this assertion, because how could the demand for goods and services being bought be high if
people don’t have enough supply of money? Just like for example, highest supply of money is when people
claims their salary, its either at the 15th of the month or end of the month, in that day people have a lot of
money supply, and we could also notice a lot of people in the restaurant and supermarket because they have
enough money to acquire goods as well as services. Therefore its value also depends on the money available
of the consumers.

10. Future Value= P 250 x (1 + .10) ^5

= 250 x (1.10) ^5
= 250 x 1.61051
Future Value = P 402. 6275

11. I prefer a 4,500 cash because it has a bigger amount even the 1,200 grows in 4 years.
12. Because if interest fluctuated all the time, the economy would become volatile. Every time the interest
rate is changed, it sends a signal to society either spend or save- and many also increase or decrease
confidence in the state of economy. A rise interest rates encourage savings, since higher interest will be
paid in money in savings accounts, and investments can grow. By contrast a drop in interest rates is intended
to cause an increase in spending, since borrowers are able to take out loans more cheaply.

13. No, because even if the inflation rate is 0, the money you invest will rise its value depending on the
interest rate provided annually.
14. Liquidity preference increases the value of the future income since in liquidity preference there is a
higher demand on money (wherein they hold assets in liquid or meaning the money is readily available),
therefore there will a higher investment and higher investment will result to higher income, therefore there
is an increase in the value of the future income.
15. Since it was an investment I would choose the investment paying 10% compounded quarterly, because
as the number of compounding period increases, so does the effective annual interest rate. Therefore
quarterly compounding produces higher returns than that of the annual compounding.
16. Inflation is one of the major causes of fluctuating interest rates. It has an impact on home loans as well.
A rising inflation rate tends to increase the rates on loans. The cost of funds for banks rises. This leads to
an increase in home loan interest rates, among other loan rates, and consequently an increase in EMIs.