Q4 Week 3 _Fiscal, and Monetary Policies

Fiscal and Monetary Policies

• Topics covered: Monetary policy, fiscal policy, their purposes and methods, comparison, and application to economic situations.

Definitions

Monetary Policy

• Measures adopted by a country's central bank to control the supply of money, aiming for price stability and full employment.

Fiscal Policy

• Government’s policies on taxes and spending to influence economic growth.

Money

• Defined as anything accepted as payment for goods and services.

• Examples include:

  • Cash

  • Checks

  • Online payments

  • Credit cards

  • Cryptocurrencies (e.g., Bitcoins)

Evolution of Money

• Barter System: First form of exchange without a standardized medium.

• Lydians: Introduced metal coins as currency.

• Development of banking systems, use of bills, and age of Mercantilism featuring gold and silver.

History of Philippine Money

Pre-Hispanic Era

• Barter rings and primitive coins like piloncitos.

Spanish Era (1521-1897)

• Introduction of legal currency (dos mundos, etc.).

American Period (1900-1941)

• Establishment of the Philippine National Bank and notes with legal tender status.

Japanese Occupation (1942-1945)

• Use of guerrilla notes and Japanese war notes.

Functions of Money

• Medium of Exchange: Facilitates market transactions.

• Standard of Value: Measures market values.

• Store of Value: Retains wealth over time.

• Standard of Deferred Payments: Supports credit-based transactions.

Components of Money Supply

• Narrow Money includes:

  1. Money in circulation (cash)

  2. Demand deposits (savings, checking accounts)

  3. Time deposits (interest-bearing accounts)

Factors Affecting Money Demand

1. Income: Directly proportional to consumption.

2. Interest Rates: High rates discourage borrowing.

3. Inflation Rates.

Why People Want Money (Keynes)

• Transactional Motive: To fulfill immediate needs.

• Precautionary Motive: For emergency needs.

• Speculative Motive: Holding as safe assets.

Types of Monetary Policy

• Contractionary: Aims to reduce money supply to control inflation.

• Expansionary: Aims to increase money supply to spur growth.

Instruments of Monetary Policy

• Discount Rate: Interest charged to commercial banks for short-term loans.

• Reserve Requirement: Portion of deposits banks must hold.

• Open Market Operations: Buying/selling government securities.

Three Pillars of Central Banking

1. Price stability via monetary policy.

2. Financial stability through regulation.

3. Efficient payment systems.

Fiscal Policy Purposes

• Achieve full employment and stable prices, manage aggregate demand and economic growth.

Classification of Taxes

1. Direct Taxes: E.g., income, property.

2. Indirect Taxes: E.g., VAT, excise.

Types of Fiscal Policy

• Expansionary: Increases spending/taxes to boost economic growth.

• Contractionary: Reduces spending/taxes to control inflation.

Summary of Actions

Monetary Policy

• Contractionary: Increase interest rates and reserve requirements, sell government securities.

• Expansionary: Decrease interest rates and reserve requirements, buy government securities.

Fiscal Policy Actions

• Increase government spending/decrease taxation for expansion.

• Decrease government spending/increase taxation for contraction.