St. Mary’s College of Tagum, Inc.

BUSINESS ADMINISTRATION PROGRAM

LEARNING
MODULE
BA CORE 6
International Trade and Agreements

VIRGINIA L. CORDOVES
INSTRUCTOR
 MODULE 3 ( WEEK 5-6 )

THE SUPPLY OF MONEY

Prov. 23:12. “Apply your heart to discipline, and your ears

BIBLE to instructive sayings.”
VERSE

Ignacian Core and Related Values: Excellence : Competence

Learning Outcomes

1. Define monetary policy.

2. Know the impact of monetary policy.
3. Distinguish the types of monetary policy.
4. Understand what money supply is.
5. Comprehend the demand and supply of money.

LEARNING CONTENT

INTRODUCTION
Money has always been important to people and to the economy. Aside from peso bills and
coins issued by the Bangko Sentral ng Pilipinas ( BSP ) , people nowadays also use checks
as money. Checks are written on accounts held at private banks. The word “ money” refers to
many things but in economics it has a specific meaning.

In this chapter, a discussion of what is monetary policy and how it is utilized by governments
in order to attain macroeconomic goals –price stability and economic i growth. Students will
also understand what exactly money is , its functions and effects in promoting economic
efficiency and its different measures as defined by BSP.

Monetary policy is a public policy that government employs in stabilizing the economy . It is a
macroeconomic policy which involves the regulation of the money supply , credit and interest

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 rates in order to control the level of spending in the economy. In particular, it is a measure or
action undertaken by central banks in the case of the Philippines this refers to the Bangko
Sentral ng Pilipinas or BSP to influence the general price level and the level of liquidity in the
economy.

If we consider the Philippines, the primary objective of the BSP’s monetary policy is to promote
a low and stable inflation conducive to a balanced and sustainable economic growth. In
addition, the monetary actions of the BSP are aimed at influencing the timing, cost and
availability of money and credit, as well as other financial functions, for the main objective of
stabilizing the price level ( www.bsp.gov.ph.)

IMPACT OF MONETARY POLICY

Like the modern view of fiscal policy, the modern view of monetary policy is the product of an
evolutionary process. In the aftermath of the Great Depression in the US and Keynesian
Revolution, there was a great debate concerning the importance of monetary policy. During
the 1950s and 1960s , most Keynesians argued that monetary policy could be used to control
inflation, but that was often ineffective as a means of stimulating aggregate demand.

Analogy of Monetary Policy and the Workings of a String

It was popular to draw an analogy between monetary policy and the workings of a string . Like a
string , monetary policy could be used to pull or hold back price increases and thereby control
inflation. However, just as one cannot push with a string , according to this popular view,
monetary policy could not be used to push or stimulate aggregate demand. In the late 1950’s ,
This position was hotly contested by Milton Friedman, and a group of economists, known as
monetarists. In contrast, the Keynesians of that era, the monetarists argued that changes in the
stock of money exerted a powerful influence on output in the short run , as well as prices in the
long run . Indeed, the monetarists charged that erratic monetary policy was the primary source
of both business instability and inflation.

Every major contraction in this country has been either produced by monetary disorder or greatly
exacerbated by monetary disorder. Every major inflation has been produced by monetary
expansion . (Milton Freidman as cited by Gwartney et al.2003 )

Two Types of Monetary Policy

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 Expansionary monetary policy refers to a monetary policy setting that intends to increase the
level of which could also result in a relative higher inflation path for the economy.
 Examples are lowering of policy interest rates and the reduction in reserve requirements.
Expansionary monetary policy tends to encourage economic activity as more funds are made
available for lending by banks to business investors. This in turn, increases aggregate
demand which could eventually fuel inflationary pressures in the domestic economy.
Expansionary monetary policy is usually undertaken in order to counteract a slowdown in the
economy.

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Contractionary monetary policy is a monetary policy setting that intends to decrease the level of
liquidity/money supply in the economy and which could also result in a relatively lower inflation
path for the economy .

Examples : increases in policy interest rates and reserve requirements . Contractionary

monetary policy tends to limit economic activity , as fewer funds are made available for lending
by banks to business investors. This in turn, lowers aggregate demand which could eventually
temper inflation pressures in the domestic economy. This type of monetary policy is employed to
limit the tendency of the economy to overheat because of the increase in aggregate spending.

MONEY SUPPLY

The money supply is the total amount of currency and other liquid instruments circulating in the
economy. The indicator represents the broad money that include currency outside banks;
demand, time, saving, and foreign currency deposits of resident sectors other than the central
government; bank and traveler's checks; and other securities such as certificates of deposit and
commercial paper. Under monetary policy , the government tries to manipulate the money
supply.

COMPOSITION OF MONEY SUPPLY

 M1 or Narrow Money is the money supply that is composed of currency in circulation , or

currency outside depository corporations and peso demand deposits.
 M2 or Broad Money consists of M1 plus peso savings and time deposits.
 M3 or Broad Money Liabilities consist of M2 plus peso deposit substitutes , such as
promissory notes and commercial papers namely, securities other than shares included in
broad money.
 M4:Liquidity Money - consists of M3 plus transferable and other deposits in foreign currency.
Almost all short term , highly liquid assets will be included in this measure.

 When considering this question of what are the reasons for holding money , you must not
confuse
1.) the desire to hold money balances with
2.) the desire for more wealth or income .
All of us would like to have more wealth , but we may be perfectly satisfied with our holdings of
money in relation to our holdings of other goods, given our current level of wealth. When we
say people want to hold more money, we mean that they want to restructure their wealth
toward larger money balances or vice versa.

 Factors that Increase the Demand for Money

1. A reduction in the interest rates.
2. A rise in the demand for consumer spending .
3. A rise in uncertainty about the future and future opportunities.
4. A rise in transaction costs to buy and sell stocks and bonds.
5. A rise in inflation causes a rise in the nominal money demand but real money demand stays
constant.
6. A rise in the demand for a country’s goods abroad

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 7. A rise in the demand for domestic investment by foreigners.
8. A rise in the belief of the future value of the currency.
9. A rise in the demand for a currency by central banks ( both domestic and foreign ).

Source : Viray, Edilberto Jr. Macroeconomics Simplied.2016

 Higher interest rates make it more costly to hold money . Consider the cost of holding P1,000
in the form of currency and demand deposits, which do not earn interest rather than in interest
earning bonds , for example. If the interest rate is 10% , it will cost you P100 per year to hold
an additional P1,000 of non-interest earning money. In contrast , if the interest is only 1% , the
annual cost to hold the P1,000 money balance will only be P10. Even if you maintain money
balances in an interest earning checking account , higher interest returns are generally
available if you are willing to tie up the funds in a bond or some other less liquid form of
savings . Thus, the opportunity cost of holding money is directly related to the nominal interest
rate.

 The demand for money balances will generally increase with the nominal value of
transactions. If wages and prices increase , more money will be required by households to
purchase the costlier weekly market basket , and more money will be required by businesses
to pay the larger wage bill. Similarly, if prices remain constant , while the quantity of goods
bought and sold increases, larger money balances will be required to conduct the larger
volume of business .

 The quantity of money available to the economy is determined by the monetary authorities ,
the BSP in the case of the Philippines .

 The BSP can use its control over reserve requirements, the discount rate , and especially
open market operations to set the supply of money at whatever level it wants. Changes in the
interest rate do not alter the BSP’s ability to determine the supply of money.

APPLICATION
.
“SMALL GROUP DISCUSSION”

The class will be grouped into four. Each group will be assigned with a question for them to
brainstorm and discuss . The teacher will randomly call a particular group who will present and
deliver their study regarding the reasons of holding money by individuals, households , firms and
Government.

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 ASSESSMENT
.

Test I. IDENTIFICATION. Supply the necessary answers on the space provided. (2 points each)
1. It has always been important to people and to the economy.
2. It is a public policy that government employs in stabilizing the economy.
3. Primary objective of the BSP.
4. They argued that monetary policy could be used to control inflation, but that was
often
ineffective as a means of stimulating aggregate demand.
5. Intends to increase the level of liquidity /money supply in the economy, which results
in higher inflation.
6. Government actions in cases of unemployment, recession and deflation.
7. Intends to decrease the level of liquidity / money supply in the economy and could
result in lower inflation.
8. In times of inflation, what is the remedy of the BSP to decrease the level of money
supply?
9. The total amount of currency and other liquid instruments circulating in the
economy.
10. It is the money supply that is composed of currency in circulation or currency
outside
depository corporations.

II. COMPARE AND CONTRAST THE FOLLOWING TERMS:

Direction: Write your answer in the space provided. (5 pts. each)

Money Supply vs. Money Demand

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

Money vs. Wealth

_____________________________________________________________________________________________________
___________________________________________________________________________________________
_________________________________________________________________________________

M1 vs. M2
___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________

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 SYNTHESIS

Monetary supply is a macroeconomic policy which involves regulation of the money supply,
credit and interest rates in order to control the level of spending in the economy. There are
two basic types of monetary policy: expansionary monetary policy and contractionary
monetary policy. While money supply as defined by economics as anything that is generally
accepted as payment for goods and services or in the payment of debts. Money has three
functions in the economy : as a medium of exchange ; as a unit of account ; and as a store
of value.

SELF-REFLECTION

1. Can we print more and more money? Explain

2. What is money in your own perspective? Explain.

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