FINANCIAL MARKETS - 2

Introducing Money and Interest Rates

Money

Any item or commodity that is generally accepted as a means of payment

Money

Composed of the bills and coins which have been printed or minted by the National Government

Money

Funds that are stored as electronic entries in one's checking account and savings account

Money

Without it, the industry and trade that form the basis of modern economies would grind to a halt and the flow of wealth around the world would cease

Fiduciary basis

A system that relies on the public's confidence in the established forms of monetary exchange.

Fiat money

Money that is not directly backed by intrinsic value

Barter

Before money, people would swap goods produced by themselves for things they needed from others.

Barter

Only sufficient for simple transactions

Banks

Where people deposit their money, earn interest, borrow money, and buy property or invest

Banko Sentral ng Pilipinas

The central bank that controls the Philippine economy

Banko Sentral ng Pilipinas

The only recognized authority that can issue money

must have value

durable

portable

uniform

divisible

limited supply

usable as a means of exchange

trust

Defining characteristic of money

Trust

A characteristic underlying all characteristics; people must be confident that they can use this in exchange for goods and services

Store of Value

CHARACTERISTICS: Money acts as a means by which people can store their wealth for future use.

Store of Value

CHARACTERISTIC: Must not be perishable; must be of practical size that can be stored and transported easily

Items of worth

CHARACTERISTIC: Money must have intrinsic value

Means of exchange

CHARACTERISTIC: Money must be possible to be exchanged freely and widely

Means of exchange

CHARACTERISTIC: Its value must be stable as possible

Unit of Account

CHARACTERISTIC: Money can be used to record wealth possessed, traded, or spent personally and nationally

Standard of deferred payment

CHARACTERISTIC: May facilitate exchange at a given point

Barter

Year of Evolution : 10,000 - 3,000 BCE

Barter

The direct exchange of goods and services for other goods and services

Fosters trading relationship

Physical goods are exchanged

Advantages of Barter

Market is needed

Hard to establish a set value on items

Goods may not be easily divisible

Larger scale transactions can be difficult

Disadvantages of Barter

Evidence of Trade Exchanges

Evolution of Money : 7,000 BCE

Evidence of Trade Exchanges

Pictures of items were used to record trade exchanges, becoming more complex as values were established and documented

Coinage

Evolution of Money : 600 BCE - 1100 CE

Coinage

Defined weights of precious metals used by merchants were formalized as coins that were issued by states.

Bank Notes

Evolution of Money : 1100 - 2000

Bank Notes

Issuing paper IOUs that were traded as currency, and can be exchanged for coins

Digital Money

Evolution of Money : 2000 onward

Virtual Money

Digital Money

Virtual money

Represent money in the bank

Barter

Early trade involved directly exchanged items - often perishable ones such as cows (5,000 BCE)

Sumerian cuneiform tablets

Scribes recorded transactions on clay tablets, which could also act as receipts (4,000 BCE)

Cowrie shells

Used as currency across India and the South Pacific, they appeared in many colors and sizes (1,000 BCE)

Lydian gold coins

In Lydia, a mixture of gold and silver was formed into disks, or coins, stamped with inscriptions (600 BCE)

Athenian drachma

The Athenians used silver from Laurion to mint a currency used right across the Greek world. (600 BCE)

Han dynasty coin

Often made of bronze or copper, early Chinese coins had holes punched in their center. (200 BCE)

Roman coin

Bearing the head of the emperor, these coins circulated throughout the Roman Empire. (27 BCE)

Byzantine coin

Early on, these coins were made of pure gold; later ones also contained metals such as copper (700 BCE)

Anglo-Saxon coin

This 10th century silver penny has an inscription stating that Offa is King ("rex") (900 CE)

Arabic Dirham

Many silver coins from the Islamic empire were carried through Scandinavia by Vikings (900 CE)

Pre-Spanish Regime

HISTORY: Philippines already traded with neighboring countries through barter

Pre-Spanish Regime

HISTORY: Penniform gold barter rings and other commodities were already in circulation

Spanish Regime

HISTORY: Spanish introduced coins in the Philippines when they colonized the country in 1521.

American Regime

HISTORY: The country's first local currency was introduced, replacing the Spanish-Filipino peso.

Philippine Peso

The Philippines' first local currency

Japanese Regime

HISTORY: The Japanese issued Japanese war notes when the Philippines was occupied by Japan during the World War II.

Mickey Mouse money

What are Japanese war notes

Post-War period

HISTORY: All Japanese currencies circulating were declared illegal, all banks were closed and PNB notes were withdrawn from circulation.

Post-War period

HISTORY: Victory money were printed

Victory Money

New treasury certificates that were printed out in P500, P200, P100, P50, P20, P10, P5, P2, and P1 denominations with the establishment of the Central Bank

Central Bank Notes

A new currency issued in 1949

New Generation Currency

A currency launched by the Central Bank in 2010 which is uniform in size where significant events in Philippine history, iconic buildings, and heritage sites were featured.

New Generation Currency Coin series

A coin currency put into circulation during 2018.

Not enough money

\____________ will slow down the economy

Slow down

Not enough money will \__________ the economy

Too much money

\________________ can cause inflation

Inflation

Too much money can cause \________________

Central bank's monetary policy

The policy that aims to stabilize price levels and to support economic growth

Monitoring the demand and supply for money

What action is vital for the Central bank's monetary policy?

Money Supply

The total value of financial assets in the economy that are considered money

M1

Narrowest measure of the money supply

M1

Refers primarily to money used as a medium of exchange

M1

MONEY SUPPLY: Currency held by the nonbank public

M1

MONEY SUPPLY: Demand deposits

M1

MONEY SUPPLY: Other checkable deposits

M1

MONEY SUPPLY: Traveler's checks

M2

Refers primarily to money used as a store of value

M2

MONEY SUPPLY: Money held in savings deposits

M2

MONEY SUPPLY: Money market deposit accounts

M2

MONEY SUPPLY: Non-institutional money markets

M2

MONEY SUPPLY: Short-term money market assets

M3

Refers primarily to money used as a unit of account

M3

MONEY SUPPLY: Money from financial institutions

M3

Money supply: Institutional money market funds

M3

MONEY SUPPLY: Larger deposits

L

MONEY SUPPLY: Other larger liquid and near-liquid assets

M3

MONEY SUPPLY: Larger liquid assets

M3

MONEY SUPPLY: Near-liquid assets

Not part of money supply

MONEY SUPPLY: Check payments from one person to another

Not part of money supply

MONEY SUPPLY: Consumer credit cards

Banko Sentral ng Pilipinas

lender of last resort

Banko Sentral ng Pilipinas

Regulatory institution responsible for determining the supply of money

Banko Sentral ng Pilipinas

Uses the daily open market operations to influence the creation of money by banks

Transaction demand

Demand for day-today payments; varies with GDP; does not depend on the interest rate

Precautionary demand

Demand as a result of unanticipated payments; varies with GDP

Speculative demand

Demand out of expectations about the interest rate in the future; negative relationship with interest rate

Rate of Interest

Price paid in the money market for the use of money

Rate of Interest

Percentage of the amount borrowed

Inverse

Relationship between the demand for currency and the Interest rate

Higher

\____________ opportunity costs of handling money \= higher savings; lower consumption

Lower

\____________ opportunity costs of handling money \= lower savings; higher consumption

Higher; Lower

Higher opportunity costs of handling money \= \_________ savings; \_________ consumption

Lower; Higher

Lower opportunity costs of handling money \= \_________ savings; \_________ consumption

L

MONEY SUPPLY:

Short-term treasury notes

L

MONEY SUPPLY: High-grade commercial paper

L

MONEY SUPPLY: Bank acceptance notes