AG

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.