MONEY

TOPIC 2

Money

is any commodity generally accepted as payment for goods and services or for the repayment of debt, and serves as an asset to its holder.

Fiduciary Basis

Modern money is no longer backed by physical gold. Instead, it operates on a —-, depending entirely on public trust and market confidence.

Economic Lubricant

Money acts as the —- facilitating billions of daily transactions; without it, economic flow would collapse.

Digital Form

While BSP still print and guarantee money, in today’s world it no longer needs to exist as physical coins or note, but can be found in —-.

Store of Value

Item of Worth

Means of Exchange

Unit of Account

Standard of Deferred Payment

5 Characteristics of Money

Store of Value

Money acts as a means by which people can store their wealth for future use. It must not, therefore, be perishable, and it helps if it is of a practical size that can be stored and transported easily

Item of Worth

Most money originally has an intrinsic value, such as that of the precious metal that was used to make the coin. This in itself acted as some guarantee the coin would be accepted

Means of Exchange

It must be possible to exchange money freely and widely for goods, and its value should be as stable as possible. It helps if that value is easily divisible and if there are sufficient denominations so change can be give

Unit of Account

Money can be used to record wealth possessed, traded or spent-personally and nationally. It helps if only one recognized authority issues money. If anybody could issue it, then trust in its value would disappear

Standard of Deferred Payment

money is also useful because of its ability to serve as a standard of deferred payment

10,000 BCE

Barter Trade & Sumerian Cuneiform Ledger Tablets

600 BCE

Precious metals used by merchants were formalized as coins by states

1100 CE

Paper Banknotes & Modern Banking Systems

1990s+

Electronic Cash, Euro, & Cryptocurrencies

Credit Card

is a payment card, usually issued by a bank, allowing the card's users to purchase goods and services, or withdraw cash on credit.

PERSONAL DEBT

Credit card enables consumers to access short-term credit which results to —-.

Pre-Spanish Era

Overcame barter inefficiencies using gold piloncitos, silver wires, and gold barter rings.

Spanish Regime

Standardized silver coinage (columnarios) introduced; country's first official mint established in 1861.

American Regime

Introduced the country’s first local currency, the Philippine Peso. The Philippine National Bank was authorized to issue Philippine Bank Notes. Later, Bank of the Philippine Island was authorized to issue its own bank notes.

Japanese WWII

Issued unbacked fiat "Mickey Mouse" currency, causing severe hyperinflation and devaluation.

Post-War & Modern

Progressed from 1944 Victory Money to the New Generation Currency (NGC) series (2010/2018).

M1: Narrow Money

Includes physical currency in active circulation plus demand/checkable bank deposits for instant liquid transactions

M2: Store as Value

Comprises all of M1 plus savings accounts, small time deposits, and non-institutional money market funds and other short-term money market assets.

M3: Broad Money

Encompasses M2 plus large-denomination time deposits, institutional funds, and term Eurodollar holdings.

L: Broader Money

Addition to M3, this measure includes liquid and near-liquid assets (e.g. short-term Treasury Notes, high-grade commercial M3: Broad Money Encompasses M2 plus large-denomination time deposits, institutional funds, and term Eurodollar holdings. paper and bank acceptance notes)

Check Payments from one person to another

—- are not part of the supply of money because it is merely transfers without being a net addition to the supply of money.

Consumer credit cards

—- are not included in the money supply; they are considered instant loans to consumers and therefore are not a net addition to the money supply.

Bangko Sentral ng Pilipinas (BSP)

is responsible for determining the supply of money.

Bangko Sentral ng Pilipinas (BSP)

also has an impact on the creation of money by banks through reserve requirements and the discount rate that is, the interest rate at which banks can borrow from the BSP as a lender of last resort.

reserve requirements, discount rate

BSP also has an impact on the creation of money by banks through —- and the —- that is, the interest rate at which banks can borrow from the BSP as a lender of last resort.

Changes in the supply of money

—- will affect the interest rate and therefore the cost of borrowing money.

Transaction Demand

Precautionary Demand

Speculative Demand

Sources of Money Demand

Transaction Demand

Cash needed for day-to-day expenditures and ordinary business settlements.

Precautionary Demand

Liquid reserves set aside to handle unexpected financial emergencies or contingencies.

Investment Timing

Cash held based on expectations regarding future interest rate movements.

Inverse Relationship

Shares a negative relationship with current interest rates—higher prevailing rates reduce speculative cash holdings.

inflexible

In the short run, certain prices (like wages tied to labor contracts) are —-, leading to economic fluctuations.

recessionary gap

real GDP is below potential GDP

inflationary gap

real GDP is above potential GDP

Higher rates make borrowing more expensive (lowering investment) and encourage saving due to higher yields (lowering consumption).

take note lang

Higher interest rates increase demand for pesos on foreign exchange markets. A stronger peso makes exports more expensive, reducing net exports.

take note lang

Higher interest rates make real GDP growth and inflation slow down.

take note lang

Lower Interest Rates stimulate growth and inflation.

take note lang

decrease the money supply, raise interest rates

When an inflationary gap occurs, the Bangko Sentral ng Pilipinas (BSP) can —- and —-.

real GDP and price levels

Decreasing money supply and raising interest rates reduces aggregate demand (investment, consumption, and net exports), lowering both —-.

In the long run, prices become fully flexible, guiding real GDP back toward potential GDP.

take note lang

Increasing the money supply at long-run equilibrium temporarily boosts aggregate demand, real GDP, and price levels (creating an inflationary gap).

take note lang

Tight labor market pushes wage rates up, raising production costs until real GDP naturally adjusts back to potential GDP.

take note lang

M x V = P x Y

M = quantity of money

V = velocity of money (i.e., the average number of times a unit of money is used during a year to purchase GDP's goods and services)

P = price level

Y = real GDP

Quantity Theory of Money Formula

Quantity Theory of Money

changes in the money supply (MS) directly influences the economy's price level, but nothing else.

Time Value of Money

it is better to receive money sooner than later.

Time Value of Money

a peso today is worth more than a peso in the future

Time Value of Money

“is the money we spent/invested today equal to the money we receive in the future”

FV = P x 1 + i^n

Time Value of Money Formula

1.Future Value (Compounding)

2.Present Value (Discounting)

Time value of money can be:

Pattern Cash Flow

In Calculating the Present Value of Future Value we consider the —- of the security

Cash flow

refers to the schedule of cash inflows (receipts) and outflows (payments) generated by the asset over its lifespan.

Single Amount/ Lump Sum

either currently held or expected at some future date.

Annuity/ Equal Amount in series

A level periodic stream of equal cash flow.

Mixed stream /Unequal Amount in series

A stream of cash flow that is not an annuity; a stream of unequal periodic cash flows that reflect no particular pattern

Future Value (FV)

is the value at a given future date of an amount placed on deposit today and earning interest at a specified rate. Found by applying compound interest over a specified period of time

FV = P + I

I = P x R x T

Simple Interest

FV = P x 1 + i^n

Compounded Interest

Present Value (PV)

is the current value of a future amount; the amount of money that would have to be invested today at a given interest rate over a specified period to equal the future amount.

is the return earned or paid over a 12-month period taking any within-year compounding of interest into account.

effective or equivalent annual return ( EAR )

EAR = (1 + r)^c - 1

Effective Annual Return Formula