CHAPTER 10

MONEY AND MONETARY POLICY

FUNCTIONS OF MONEY
Money is fundamental in the functioning of the economy. It
facilitates the exchange of goods and services and to reduce the
amount of time and effort to carry out a trade transaction and
money have different function namely:
1. As a medium of exchange
2. As a unit of account
3. As a store of value
4. Standard for deferred payments
 Medium of exchange
Money can be used for buying and selling goods and services.
 Unit of account
Money is the common standard for measuring relative worth of goods and
services
 Store of value
Money is the most liquid asset (liquidity measures how easily assets can be
spent to buy goods and services).
 Standard for deferred payments
Money facilitates transactions that involve loans in the form of cash or goods.
DEMAND FOR MONEY

The demand for money refers to holding on with your

money and the following are the three types of demand:
1. Transactions demand
2. Precautionary demand
3. Speculative demand
 Transaction demand
The transactions motive for demanding money arises from the fact that most
transactions involve an exchange of money.
 Precautionary demand
People often demand money as a precaution against an uncertain future.
 Speculative demand
People hold money for speculative purposes, keep the money so that one can
respond to financially attractive opportunities like the buying of stocks and bonds.
Composition of Money Supply

The Bangko Sentral ng Pilipinas (BSP) defines money on the basis of

its components namely:
1. Narrow money (M1)
2. Broad money (M2)
3. Broad money (M3)
4. Liquidity money (M4)
 Composition of Money Supply
Money Supply Composition
 M1 or Narrow money  Currency in circulation
a. Coins
b. Paper money
Demand deposits
 M2 or Broad money  M1 plus peso deposit or
a. Savings deposit
b. Time Deposit and balance in retail
money market mutual funds
 M2 plus deposit substitutes or
 M3 or Broad Money Liabilities
promissory notes and commercial
papers
 M4 or Liquidity Money held in foreign  M3 plus transferable currency
currency deposits of non bank residents
Philippine Financial System

The Philippine financial system consists of three major

groups of institutions involved in the mobilization and
intermediation of private savings as well as allocation of
financial resources, these institutions are:
1. Bangko Sentral ng Pilipinas
2. Banking System
3. Non – Bank Financial Institutions
Bangko Sentral ng Pilipinas
The primary mandate of the BSP is to maintain price stability
conducive to a balanced and sustainable economic growth.
Under the New Central Bank Act, the BSP performs the following
functions, all of which relate to its status as the Republic’s central
monetary authority.

1. Liquidity Management
2. Currency issue
3. Lender of last report
4. Financial Supervision
5. Management of foreign currency reserves
6. Determination of exchange rate policy
7. Other activities
Banking System

The Philippine banking system consists of duly licensed

and registered banking entities engaged in the lending of
funds obtained in the form of deposits. These institutions
include universal banks and Islamic banks.
Non – Bank Financial Institutions

Non – bank Financial Institutions (NBFIs) refer to all

financial institution other than banks engaged principally in
the provision of a wide range of financial services.
Monetary Policy Instruments
Measures or actions by the Central Bank to regulate the supply of
money in the economy constitute.
In the Philippines, monetary policy instruments are classified into:
1. Open Market Operations (OMO)
It involves the buying or selling of government securities from banks and financial
institutions of the BSP in order to expand or contract the supply of money.
2. Rediscounting
This refers to transactions whereby the BSP extends credit to a bank collateralized by its
loan papers with customers.
3. Reserve Requirement
This is the minimum amount of reserves that banks must hold against deposits.
4. Direct Controls
These consist of quantitative and qualitative limits on the ability of banks to undertake
certain activities.
5. Moral suasion
The BSP persuades banks to make their lending policies responsive to the needs of the
economy.