How will money supply changes in the circulation?

1. Reserve Requirement 2. Discount Rate 3. Open Market Operation

- private loaning - bank loaning -government loaning - buying and selling of bondsDemand for
money
DEMAND FOR MONEY
1. Transactional demand- exchange 2. Precautionary demand 3. speculative demandSupply of money

M1 – currency in circulation (or currency outside depository corporations) and peso demand deposits.
M2 – M1 plus peso savings and time deposits.
M3 – M2 plus peso deposit substitutes, such as promissory notes and commercial papers (i.e., securities other than
shares included in broad money).
M4 - M3 plus other deposits in foreign currency.

Changing money supply

1. reserve requirement
lending capacity may also affect RR
creation of money
- deposit-loans/ lending

With 100B deposit, how much change in money supply will

possibly occur?
reserve requirement=
required reserve ratio x total deposits
excess reserve =
total reserve - reserve requirement
potential deposit creation =
excess reserve x money multiplier
money multiplier =
1/required reserve

WHAT IS MONEY?WHAT ARE THE FUNCTIONS OF MONEY?

1. Medium of Exchange 2. Unit of Account 3. Store of ValueTHE NEW

GENERATION PHILIPPINE BANKNOTES

20 PISO BANKNOTE
Obverse : President Manuel L. Quezon, Malacanan Palace, Seal of the Republic
of the Philippines, New Bsp Seal.
Reverse: - Banaue Rice Terraces, Palm Civet, Weave design from theCordilleras

50 PESO BANKNOTE
Obverse: President Sergio Osmena, First National Assembly 1907,
Leyte Landing, Seal of the Republic of the Philippines, and the
New Bsp Seal.
Reverse: Taal Lake, Maliputo, embroidery design handcrafted inBatangas Province

100 PISO BANKNOTE

Obverse: President Manuel A. Roxas, Central Bank of the Philippines (1949),
Inauguration of the Third Republic(July 4, 1946), Seal of the Republic of the Philippines,
and the New Bsp Seal.
Reverse: Mayon Volcano, Whale Shark, Indigenous textile from the Bicol Region

200 PISO BANKNOTE

Obverse: Pres. Diosdado P. Macapagal, EDSA people power II, Independence
House, Barasoain Church, Seal of the Republic of the Philippines, New Bsp Seal.
Reverse: Bohol Chocolate Hills, Tarsier, handcrafted design from the Visayas in Central Philippines.
500 PISO BANKNOTE
Obverse: Icons of Democracy : President Corazon C. Aquino, Senator Benigno
Aquino Jr. EDSA People Power I February 1986, Ninoy Monument, Seal of the
President, New Bsp Seal.
Reverse: Puerto Princesa Subterranean River Nationa Park (UNESCO World
Heritage Site), Blue-naped Parrot, woven cloth from the Southern Philippines.

1000 PISO BANKNOTE

Obverse : War Heroes - Josefa Llanes Escoda, Vicente P. Lim and Jose Abad Santos,
Centennial of Philippine Independence, Medal of Honor, Seal of the Republic of the
Philippines, New Bsp seal.
Reverse:
Tubbataha Reefs Natural Park (UNESCO World Heritage Site), South Sea
Pearl, Tinalak or Ikat-dyed abaca woven in Mindanao in Southern Philippines.

SECURITY FEATURES
1. Embossed Prints - raised prints that feel rough to the touch, i.e. The word "REPUBLIKA NG PILIPINAS"
and "DALAWANG PISO", portrait, signatures, value panels on the face of the note.
2. Serial Number - composed of 1 or 2 prefix letters and 6 or 7 asymmetric (increasing in size)
digits located at the lower left and upper right corners of the face of the note.
3. Security Fibers - red and blue visible fibers embedded on the paper at random and glow in 2 colors under
ultraviolet light.
4. Watermark - a shadow image of the portrait and the numeral "20" seen at the blank space of the note when viewed
against the light from either side of the note.
5. See - Trough Mark - word “Pilipino” written in Baybayin is seen in complete from when the note is viewed
against the light.
6. CONCEALED VALUE – denomination value superimposed on the smaller version portrait at the upper left side
of the note becomes obvious when the note is rotated 45 deg & tilted down.
7. SECURITY THREAD - embedded thread running vertically across the note is visible from either side of the note
when viewed against the light.
8. OPTICALLY VARIABLE DEVICE – reflective foil that bears the image of the Blue -naped Parrot & a small
BSP
Logo. The color of the parrot changes from red to green when the note is rotated at 90 degrees.
9. OPTICALLY VARIABLE INK – embossed “1000” denominational value at the lower right corner of the face of
the note changes color from green to blue when viewed at different angle.

Fiscal Policy
1.change in government expenditure 2.change in tax 3.change in transfer payment
Fiscal policy
Is the deliberate manipulation of government purchases, transfer payments, taxes and borrowing in order to
influence macroeconomic variables such as employment, the price level, and the level of GDP among others.
 It refers to the Revenue and Expenditure policy of the Govt. which is generally used to cure recession and
maintain economic stability in the country.

Aggregate Demand Affects Production or GDP

Macro Problem: Weak Economy (Unemployment)
Policy Strategy: Fiscal Stimulus
- Increase GE - Decrease Tax- Increase Transfer Payment
Macro Problem: Overheated Economy (Inflation)
Policy Strategy: Fiscal Restrain
- Decrease GE - Increase Tax - Decrease Transfer Payment

Macro Problem: Weak Economy (Unemployment)

Policy Strategy: Fiscal Stimulus
 Fiscal Options Amount
Increase Gov't Purchases Desired FS (AD shortfall multiplier) k=1/1-mpc
Cut Taxes DFS over MPC
Increase Transfer Payments DFS over MPC
Macro Problem: Overheated Economy (Inflation)
Policy Strategy: Fiscal Restraint
Fiscal Options Amount
Reduce Gov't Purchases DFR (exceed AD divide multiplier)
increase Taxes DFR/MPC
Reduce Transfer Payments DFR/MPCPayments

The recession in major export markets squeezed Philippine export revenues. Export receipts from January to
November 2009 contracted by 24.6 percent to 35 billion U.S. dollars, while the industry sector fell 2 percent. That,
combined with the
typhoons Ketsana (0ndoy) and Parma (Pepeng) that slashed farm production in the fourth quarter and slowed full year
farming, fishery and forestry growth to 0.1 percent, battered last year's economic performance. The official GDP
figures, which were released by the government on Thursday, hit the lower end of the official target of 0.8-1.8 percent
year-on-year growth.

How much Fiscal Stimulus is Need?

Year GDP target In millions Expected Fall GDP Gap In millions
2009 1,654,753 1.8% 29785.56
MPC of the Philippines is=0.835

Inefficiency of Fiscal Policy

Crowding out
A reduction in private-sector borrowing (and spending) caused by increased of government borrowing.
Time Lags
Types of Time lag:
Recognition Time Lag – government difficult to recognized recession
Action Time Lag – the process of applying
Effect Time Lag –the effect of the fiscal policy
Pork Barrel Politics

Economic Effects of Deficit

(too much fiscal stimulus)
 Burden of Debts
 Kinds of debts
 Internal Debts
 Treasury bonds or bills (T-bills /T-bonds/securities)- can create crowding out
 External Debts
No crowding out if debts are repaid with exports of real goods and services
 Refinancing
- The issuance of new debt in payment of debt issued earlier

Economic Effects of Deficit

 Burden Debt
Debt Service
The of interest required to be paid each year on outstanding debt.

Economic Effects of Deficit

 Burden of Debt
 *Opportunity Cost
- Crowding Out
- Economic Growth
 If debt-financed government spending crowds out private investment, generations will bear some of the
debt burden
 Refinancing hurdles economic growth
 Deficit/ Debts Ceiling
-An explicit, legislated limitation on the size of the budget deficit/ debt

Economic Effects of Surplus

Crowding in
 Potential Uses of budget Surplus
 -Spend it on goods and services
 -Cut taxes
 -Increase money Transfer
 - Pay off old debt (save it)

 With fiscal and monetary inefficiency how/which/what policy can stabilize that economy?
Fiscal Policy over Monetary Policy
 Short Run Business Cycle
 Inflation

Monetary Fiscal
Easier to implement Difficult to Implement
Slower Effect Faster Effect

Objectives of the Economy: MACROECONOMICS

 Increasing Production Stable Price Low unemployment  Balance of Payment

• Components of Expenditure Approach (GDP) AggregateDemand

– Consumption spending (C), investment spending (I),government purchases (G), and net exports (NX).

• Aggregate demand is the total demand for goods and services in an entire economy.
• The aggregate demand curve plots the total demand for GDP as a function of the price level.
• The aggregate demand curve slopes downward.
• The money supply is the quantity of money available in an economy. The control over the money supply is called
monetary policy.

Monetary Tools / Policy

– Controlled by central Bank
• Reserve Requirement • Discount Rate • Open Market Operation
The use of money and credit controls to influence macroeconomics outcome

The Equation of Exchange MV= PQ is theAggregate Demand

where:
P = price of goods
Q = quantity of goods sold in a period
M = money supply
V = velocity of circulation
What will happen to the Aggregate Demand?
1. Government buys bonds.
2. Velocity of Money will decrease.
3. Higher money supply that leads to inflation.

Summary for Monetary Policy

 • Monetary Expansion/ Stimulus
– Decrease RRR – Decrease Discount Rate – Buying of Bonds
• Monetary Contraction/ Restraint
– Increase RRR – Increase Discount Rate – Selling of Bonds

Monetary Inefficiency
• Reluctant Lenders
• Low Expectation
• Liquidity Trap
- is a situation when expansionary monetary policy (increase in money supply) does not increase the interest
rate .
• Short- vs. Long-term Rates
• Time Lags