Chapter 8: Money and Monetary Policy PDF

Chapter 8: Money and Monetary Policy Group 9 1.Armando, Van Clark 2.Brillo, Joseph Gian 3.Orticio, Elijah Jasper S. 1 MANAGERIAL ECONOMICS IN THE 21ST CENTURY DEFINITION OF TERMS Money - is a generally accepted medium of exchange used to purchase g...

Chapter 8: Money and Monetary Policy Group 9 1.Armando, Van Clark 2.Brillo, Joseph Gian 3.Orticio, Elijah Jasper S. 1 MANAGERIAL ECONOMICS IN THE 21ST CENTURY DEFINITION OF TERMS Money - is a generally accepted medium of exchange used to purchase goods and services or to repay debts. It is considered as wealth. It is also the reason why we have businesses so people engage in business primarily because of earnings (money). Types of Money Commodity Money - A money in the form of gold and silver or an item that has an intrinsic value. Fiat Money - A money issued by a government and its value derives from government decree. (e.g. the peso bills that we use now for purchasing goods and services.) Barter - It is the exchange of two commodities between two parties. We commonly did it before as a mode of payment because we don't have money yet during that time. 3 Functions of Money Medium of exchange - This is the primary function of money. Money facilitates transactions where goods and services are directly exchanged. Money serves as a universally accepted means of payment, facilitating trade by eliminating the need for barter. Unit of Account - Money provides a common measure of value. (e.g. ₱180 worth of 1kg of chicken but we only bought half kilo so we will pay only ₱90). Provides a common standard for measuring the value of goods and services, making it easier to compare prices and make economic decisions. Store of Value - Money can be saved and used to purchase goods and services in the future. (e.g. we keep our ₱100 for our future purposes, it is still ₱100 if we will now use it. The value doesn't increase or decrease). Allows individuals and businesses to save and accumulate wealth for future use, offering a more secure way to store value compared to commodities or precious metals. 2 MANAGERIAL ECONOMICS IN THE 21ST CENTURY ENUMERATION Concept of Banking Financial Intermediation: Banks act as intermediaries between savers and borrowers, channeling funds from those with surplus to those in need. Deposit-Taking: Banks accept deposits from individuals and businesses, offering a safe place to store money in various forms like savings accounts, checking accounts, and fixed deposits. Lending: Banks provide loans to individuals and businesses for purposes such as buying a home, starting a business, or financing education. Loans can be secured (backed by collateral) or unsecured. Safeguarding of Money: Banks protect your money by keeping it safe in secure vaults and using strong cybersecurity for online accounts. They also have government-backed insurance to ensure you get your money back if the bank fails. This helps build trust and keeps the banking system stable. Functions of Banks Deposit-Taking: Accepting deposits from customers, providing a safe and secure place to store money. Lending: Offering loans to individuals and businesses, generating interest income. Investment Banking: Assisting in the issuance of securities, and facilitating mergers and acquisitions. Treasury Operations: Managing a bank’s financial assets and liabilities, engaging in trading stocks and securities to manage risk and maximize returns. Trust and Estate Services: Managing assets on behalf of individuals or organizations, such as savings for future events like education or retirement. Foreign Exchange Services: Facilitating currency exchange for international transactions. Safe Deposit Boxes: Providing secure storage for valuables. Payment Services: Offering various payment options, including checking accounts and credit cards. Financial Advisory Services: Providing advice on investments, retirement planning, and other financial matters. Risk Management: Helping customers manage risk through insurance and other financial products. 3 MANAGERIAL ECONOMICS IN THE 21ST CENTURY Types of banks Universal banks: Universal banking combines the services of a commercial bank and an investment bank, providing all services from within one entity. The services can include deposit accounts, a variety of investment services, and may even provide insurance services. Commercial banks: A commercial bank is a financial institution that accepts deposits, offers checking and savings account services, and makes loans. Thrift banks: is a type of financial institution that specializes in offering savings accounts and originating home mortgages for consumers. Rural banks: traditional banks that serve farmers, fishermen, workers or communities away from the highly-dense metropolitan cities in a country. Cooperative banks: A cooperative bank is one which is organized, owned and controlled by cooperative organizations, for the purpose of providing financial and credit services to cooperatives and their members. Islamic banks: Islamic banking is defined as a banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah. Digital banks: A digital bank represents a virtual process that includes online banking, mobile banking, and beyond. As an end-to-end platform, digital banking must encompass the front end that consumers see, the back end that bankers see through their servers and admin control panels, and the middleware that connects these nodes. 4 MANAGERIAL ECONOMICS IN THE 21ST CENTURY Central banking in the Philippines The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines. It was established on 3 July 1993 pursuant to the provisions of the 1987 Philippine Constitution and the New Central Bank Act of 1993. Monetary Policy Monetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied. As part of the main role of BSP in regulating banks and in managing money supply, the BSP uses different monetary tools in controlling the money circulating in the hands of the public. Why does BSP need to control the supply of money? We can apply a simple lesson here. If everyone has it, what will make you want it more? People buy the newest gadget because it has new features, it is different, and not everyone likes it. Take the iPhone 10 as an example. If I will give you an iPhone 10 in exchange for the most recent cell phone that Apple or another brand has released (which you now own), will you be open to trading? Your answer will probably be no because everyone you know has an iPhone 10 and you can even have it for free. 5 MANAGERIAL ECONOMICS IN THE 21ST CENTURY Money Creation Another concept connected to banking is the concept of money creation. The concept of money creation believes that when money is placed in banks and financial institutions, it multiplies. When we talk about money multiplying, it means that its value is increasing. Money creation, or money issuance, is the process by which the money supply of a country, or an economic or monetary region, is increased. Table 8.1 Bank New Deposit 20% Reserves Loans & Investment 1 1000.00 200 800 2 800.00 160.00 640 3 640.00 128.00 512 4 512.00 102.40 409.60 5 409.60 81.92 327.68 48 0.03 0.01 0.02 49 0.02 0.00 0.02 4999.91 999.98 3999.93 If you look at Table 8.1, we can see that Bank 1 has Php 1,000. It reserves its Php 200 based on BSP mandate, and lends out the remaining Php 800. The borrower would deposit that Php 800 in the bank and the same shall be done by the succeeding banks to which these amounts are to be deposited to. When we talk about money creation, it is not all about physically multiplying money. It is a concept that you may not physically multiply it, but the value it bears, the recorded amounts that it reflects on the bankbooks, and the number that grows in your bank account increase in the macro level. At the end of the day, money is just a worthless piece of paper whose validity comes from government laws and whose value comes from the amount that results from our demand. Its supply, meanwhile, is influenced by the BSP, together with the other transactions that are done by the government system. Indeed, without money, we might still be visiting the market, bringing with us kitchen wares, yards of silk, and some lamps to trade and try to find satisfaction in whatever item we will see there, and hopefully, that includes toiletries. 6 MANAGERIAL ECONOMICS IN THE 21ST CENTURY  SUMMARY money, Commodity accepted by general consent as a medium of economic exchange. It is the medium in which prices and values are expressed, and it circulates from person to person and country to country, thus facilitating trade. Money has many functions. The four main functions of money include: acting as a standard of deferred payment, being used as a store of value, acting as a medium of exchange, and being used as a unit of account. banks do many things, their primary role is to take in funds—called deposits—from those with money, pool them, and lend them to those who need funds. Banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money). There are 10 function of bank. There are 7 types of bank here in the Philippines. Central banks conduct monetary policy, which includes setting interest rates, managing the money supply, and regulating financial markets. Monetary policy is a set of actions to control a nation's overall money supply and achieve economic growth. Monetary policy strategies include revising interest rates and changing bank reserve requirements. Monetary policy is commonly classified as either expansionary or contractionary. Money creation, or money issuance, is the process by which the money supply of a country, or an economic or monetary region, is increased. In most modern economies, money is created by both central banks and commercial banks. Reference https://drive.google.com/drive/folders/1i1xAwMINal-0tN0fby5Fc4CVUExeaMQI https://docs.google.com/document/d/1IsHSSY1vb8K25ifbYGgAEhBArHX3xW1B5RY0f0N Mvtk/edit?usp=sharing MANAGERIAL ECONOMICS IN THE 21ST CENTURY