LESSON-2-FM-221

Money Supply and Interest Rate Overview

• Focus of discussion in Weeks 4-5.

Lessons Outline

1. Historic Forms of Money

2. Types of Money and Currency

3. Functions of Money

4. Motives of Holding Cash

5. Interest perspectives:

   • Borrower

   • Lender

   • Simple Interest

   • Compound Interest

6. Impact of Interest Rates on the Economy

Historic Forms of Money

1. Livestock: cows, horses, camels, bulls

2. Commodity: food grains, cereals

3. Shells: cowrie shells

4. Precious Stones: diamonds, rubies, emeralds

5. Precious Metals: gold, silver, copper, bronze, lead

6. Fiat Money: government-issued metal coins and paper currency

Physical Currency

A. Banknotes (Paper Money)

• Official currency: Philippine Peso (PHP)

• New Generation Currency (NGC) series features:

  • P20: Manuel L. Quezon

  • P50: Sergio Osmeña

  • P100: Manuel A. Roxas

  • P200: Diosdado Macapagal

  • P500: Corazon Aquino & Benigno Aquino Jr.

  • P1,000: José Abad Santos, Vicente Lim, Josefa Llanes Escoda

• Polymer version of P1,000 bill released in 2022.

B. Coins

• Current NGC Coins:

  • 1 centavo (P0.01)

  • 5 centavos (P0.05)

  • 25 centavos (P0.25)

  • P1, P5, P10, P20 (introduced in 2019)

• Commemorative Coins issued for special occasions.

Digital and Electronic Money

A. E-Money

• E-wallets: widely used for digital transactions.

  • Examples: GCash, Maya, Coins.ph, GrabPay

B. Cryptocurrency

• Not official currency but used for payments and trading.

• Regulated by Bangko Sentral ng Pilipinas (BSP).

  • Examples: Bitcoin (BTC), Ethereum (ETH), stablecoins (e.g., USDT).

Foreign Currencies

• US Dollar (USD): widely accepted for business and remittance.

• Other major currencies: Euro (EUR), Japanese Yen (JPY), Chinese Yuan (CNY).

Functions of Money

1. Medium of Exchange

• Eliminates wastage of time.

• Increases transaction volume.

• Removes coincidence of wants.

• Widely acceptable.

• Increases trade levels.

2. Unit of Account

• Provides common measurement of relative value.

3. Store of Value

• Ability to store value over time.

• Durability ensures future purchases.

• Market inflation can threaten this function.

Motives for Holding Money

• Transaction Demand: For daily expenses and quick purchases.

• Precautionary Demand: For uncertain expenses, minimizing loan dependence.

• Speculative Demand: Expecting interest rate rises, converting money into interest-bearing assets.

The Price of Money

• Interest Rate: Cost of borrowing or reward for saving.

• Influenced by:

  • Inflation

  • Economic growth

  • Government policies

Supply and Demand Impact on Interest Rates

1. High Supply & Low Demand → Low Interest Rates

2. Low Supply & High Demand → High Interest Rates

Real-World Factors Influencing Interest Rates

1. Central Bank Policies: Control over money supply and interest rates.

2. Economic Conditions: Economic growth vs. recession influences borrowing.

3. Inflation Expectations: Anticipated inflation increases lender demands.

Simple Interest

• Calculated only on the principal amount.

• Formula: I = Prt

  • Example with P10,000 at 7% for 1 year → Interest = P700.

Compound Interest

• Interest calculated on both principal and accumulated interest.

• Example: P1,000 at 5% compounded quarterly for 3 years → Approximately P1,161.62.

Economic Impact of Interest Rates

1. Borrowing/Lending: Higher rates → Less borrowing; lower rates → More borrowing.

2. Consumer Spending: High rates deter purchases; low rates encourage spending.

3. Business Investment: High rates reduce investments; low rates promote expansion.

4. Saving: High rates incentivize saving; low rates discourage it.

5. Inflation: Lower rates can raise inflation; higher rates help control it.

6. Currency Value: High rates attract foreign investments; low rates may weaken currency.

7. Employment/Wages: Low rates boost job creation; high rates may hinder employment.

Central Bank Role

• Adjust interest rates for inflation control, economic growth, and currency stability.