Module 5

John Maynard Keynes

- british philosopher and economist
- spent years working with the East India Company
- father of Keynesian Economics
- rstborn
- His siblings; Geo rey (surgeon) and Margaret (Nobel prize physiologist)
- known for theories of Keynesian economics that addressed causes of long-term
unemployment
- in a paper titled, “The General Theory of Employment, Interest and Money”, Keynes
became a proponent of full employment and government intervention to stop economic
recession

John Maynard Keynes Motives for holding money

According to Keynes, we hold money for three purposes:

1. Transaction motive - amount of money held for everyday transactions such as paying
co ee. Keeping little cash makes life easier as expenditures are there every single day.
2. Precautionary motive - helps face unforeseen circumstances or for a rainy day;
emergencies. Future is uncertain.
3. Speculative motive - hold on to cash to buy assets when their prices actually fall. Ex.
stocks, sales.

Money Aggregates
- measures money supply in an economy

M0 - physical paper and coin

M1 - all of M0 + travelers checks and demand deposits
M2 - all of M1 + money market shares and savings deposits
M3 - all of M2 + time deposits over $100,000 and institutional funds

M1 - metric for the money supply of a country and includes physical money as well as
checking accounts, demand deposits, and negotiable order of withdrawal. Most liquid
portions of money are measured by M1 because it contains currency and assets that can
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 be converted to cash quickly. Near money which fall under M2 and M3 cannot be converted
to currency quickly.

Bangko Sentral - uses money aggregates as metric for how open market operations — like
trading in Treasury securities or changing the discount rate — a ect the economy.

M1 and M2 - reported on a weekly basis. This enables investors to measure money

aggregates rate of change and monetary velocity.

Quantity Theory of Money

- states that there is a direct relationship between quantity money in an economy and the level
of prices of goods and services sold.
- if the amount of money in an economy doubles, then price levels also double causing
in ation.
- Increase in money supply causes prices to rise as they compensate for the decrease in
money’s marginal value.
- Money is like any other commodity: increases in its supply decreases marginal value.
- Concept of QTM began in the 16th century. As gold and silver in ows from Americas into
Europe were being minted into coins, there was a resulting rise in in ation

Henry Thorton
- assumed in 1802 that money equals more in ation
- an increase in money supply does not mean an increase in economic output.

QTM fomula: MV = PY - by Irving Fisher

M - money supply
V - Velocity of Circulation
P - Average Price Levels
Y - Volume of Transactions of Goods and Services

The right hand side represents the price level and real GDP
Taken together, these two represent Nominal GDP or the total spending that takes places in an
economic in a given time period.

The left hand side represents the measure of money supply.

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 VELOCITY - represented the number of times money changes hands in support of the toal
spending in an aggregate economy.

Quantity Equations
- the original theory was considered orthodox among 17th century classical economists and
was overhauled by 20th century economists Irving Fisher who formulated the above
equation and Milton Friendman.

Amount of Money x Velocity of Circulation = Total Spending

Ex. If an economy has P3billion, those P3billion were spent ve times in a month then the total
spending for the money would be P15billion (3 x 5 = 15)

QE adds assumption to the logic of the equation of exchange

- in its most basic form the theory assumes that V and T are constant in the short term
- these assumption have been criticized particularly the assumption that V is constant
- the arguments point out that the velocity of circulation depends on consumer and business
spending impulses which cannot be constant
- the theory also assumes that quantity of money, which is determined by outside forces, is
the main in uence of economic activity in a society.
- A change in money supply results in changes in price levels or change in supply of goods
and services.
- It is primarily these changes in money stock that causes change in spending
- The velocity of circulation depends not on the money available or current price level but on
changes in in price elevels.
- Essentially, the theory imples that value of money is determined by the amount of money
available in an economy.

In ation
- sustained increase in the general price level of goods and services in an economy over a
period of time.
- when the price level rises, each unit of currency buys fewer goods and services.
- in ation re ects a reduction in the purchasing power per unit of money, a loss of real value in
the medium of exchange and unit of account within the economy.
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 Consumer Price Index (CPI)
- chief measure of price in ation is the in ation rate, annualized percentage change in a
general price index, usually the consumer price index

Price index
- a normalized average of price relatives for a given class of goods or services in a given
region during a given interval of time

Consumer Price Index (CPI)

- for particularly broad indices, the index can be said to measure the economy’s general price
level or cost of living

Cost of living
- the cost of maintaining a certain standard of living

Consumer Price Index (CPI)

1. Learn the In ation Rate Formula:

[Currency CPI - Historical CPI/Current CPI]

In ation

Negative e ects
- discourage investment and savings
- shortages of goods as consumers hoard
- economists believe that high rates of in ation are caused by excessive growth in money
supply.

Interest Rates and Bangko Sentral

- In ation and interest rates are linked
- refers to the rate at which prices of goods and services rice
- interest rates are determined by the Bangko Sental ng Pilipinas

Expansionary Monetary Policy

- when a central bank uses its tools to stimulate the economy increasing money supply,
lowering interest rates, and increasing aggregate demand
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- In general, when interest rates are lowered more people borrow more money cause economy
to expand.

Contractionary Monetary Policy

- form of economic policy used to ght in ation which involved decreasing the money supply
in order to increase of of borrowing which decreases GDP and dampens in ation
- as interest rates increases, consumers tend to save. With less disposable income to spend,
economy slows and in ation decreases.

Monetary Board
- meets each year to review economic and nancial consitiond to decide monetary policy

Monetary Policy
- refers to actions taken to a ect the availability and cost of money and credit
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 Module 6: History of Bangko Sentral ng Pilipinas

Bangko Sentral
- the central bank of the Philippines
- established on July 3, 1993 pursuant to the provision of RA 7653 amended by RA 11211

American era and World War 2

- in 1900, the rst Philippine Commission passed Act No. 52, placed all the banks under the
Bureau of Treasury authorizing the Insular Treasurer to supervise all banking activties
- in 1929, the Depart of Finance took over bank supervision
- In 1933, a group of Filipinos conceptualized a central bank for the Philippine Islands.
- Hare-Hawes-Cutting Act would be rejected by the Senate urging President Manuel L.
Quezon
- The Senate advocated a new bill called Tydings-McDu e Act, which would grant Philippine
independence on July 4, 1946
- The country’s monetary system was administered by the Department of Finance. Philippine
peso was on the exchange using US dollar, which is backed by gold reserve.
- As required by the Tydings-McDu e Act, the National Assembly of the Philippines
established a central bank in 1939. The president of the US did not give his signature.
- During the Japanese-controlled Republic, the implementation was aborted.

Third Republic and Martial Law

- President Manuel Roxas instructed Finance Secretary Miguel Cuaderno to draw up a
charter for a central bank
- The commission recommended a shift from dollar exchange standard to a managed
currency system. A central bank was necessary to implement this shift to a new system.
- June of 1948, President Quirino a xed his signature on the Central Bank of 1948
- January 3, 1949 the Central Bank of the PH is inaugurated with Miguel Cuaderno as the rst
Governor. Its responsibilities were to maintain internal and external monetary stability and
promote economic development.
- In 1972, President Marcos amended RA 265 emphasizing the maintenance of domestic aand
international monetary stability as the primary objective of the Central Bank.
- The Bank’s authority was also expanded to include regulation not just supervision.
- In the 1973 Constitution, Batasang Pambansa was mandated to establish an independent
monetary authority.
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Present
- President Fidel V Ramos signed the New Central Bank Act on June 1993
- Establishment of an independent monetary authority with its primary objective being the
maintenance of price stability instead of it just being implied.