MONEY AND

MONETARY
POLICIES
CHAPTER 10

Reporter: Mary Ann J. Baguio

A. FUNCTION OF MONEY AND MONEY SUPPLY

1. Function of Money
1A 3C
(Money as a medium
of exchange)

2B
2. Money Supply
- Money is a vehicle of economic
activities when in circulaton

It includes: -

 Coins and bills in circulation

 Demand deposits in banks
 Quasi-money
- Savings deposits
- Time deposits
 Deposit substitutes
3. Money Velocity and Income
Money supply as a medium of
exchange multiplies into income.

MV= Y
MV= PQ
Y= PQ
M= Money supply
V= Velocity
Y= Nominal money income
P= Price
Q= volume of goods and services
 B. BANKS AND MONEY SUPPLY

1. The Fractional Reserve System

- is a system in which only a fraction of bank deposits are
backed by actual cash on hand and available for withdrawal.
This is done to theoretically expand the economy by freeing
capital for lending.
 TABLE 34
Deposit Liability Creation
ASSET LIABILITIES
P 1000000 P 100000
80000 80000
60000 60000
: :
N B
P 500000 P 500000

Note: n is an infinitely small value almost equals to zero implying no more funds
available for additional spending
 2. Money Creation

Expressed as follows:

L= mR

M= L/R

R= L/R < 1
Therefore: M= 1/r

where:
m= Money multiplier
R= Reserves
L= deposit liabilities
r= ratio of reserves to be
deposit liabilities or
fractional cash demand
ratio
 R= P 100 B
r= 0.20 (or 20%)
m= 1/r
= 1/0.20
= 5

Money created = Reserves x m

= P 100 B x 5
= P 500 B
THANKYOU!

CHAPTER 10

Reporter: Mary Ann J. Baguio