Chapter 2 Flashcards
In the Philippines, the __________ that controls the country’s economy is the
Bangko Sentral ng Pilipinas
Money acts as a means by which people can store their wealth for future use. It must not, therefore, be perishable, and it helps if it is of a practical size that can be stored and transported easily.
Store of Value
Most money originally has an intrinsic value, such as that of the precious metal that was used to make the coin. This in itself acted as some guarantee the coin would be accepted.
Item of worth
It must be possible to exchange money freely and widely for goods, and its value should be as stable as possible. It helps if that value is easily divisible and if there are sufficient denominations so change can be given.
Means of exchange
Money can be used to record wealth possessed, traded or spent- personally and nationally. It helps if only one recognized authority issues money. If anybody could issue it, then trust in its value would disappear.
Unit of account
In early forms of trading, specific items were exchanged for others agreed by the negotiating parties to be of similar value.
Barter (10,000 - 3000 BCE)
the direct exchange of goods - formed the basis of trade for thousands of years. Adam Smith, 18th-century author of The Wealth of Nations, was one of the first to identify it as a precursor to money.
Barter
Essentially, barter involves the exchange of an item (such as a cow) for one or more of a perceived equal “value” (for example a load of wheat). For the most part of the two parties bring the goods with them and hand them over at the time of a transaction. Sometimes, one of the parties will accept an “I owe you,” or IOU, or even a token, that it is agreed can be exchanged for the same goods or something else at a later date.
Barter in practice
Advantages of Barter
Trading relationship – Fosters strong links between partners. Physical goods are exchanged – Barter does not rely on trust that
Money will retain its value.
Disadvantages of Barter
Market needed – Both parties must want what the other offers. Hard to establish a set value on items – Two goats may have a certain value to one party one day, but less a week later.
Goods may not be easily divisible – For example, a living animal cannot be divided.
Large-scale transactions can be difficult. – Transporting one goat is easy, moving 1,000 is not.
Pictures of items were used to record trade exchanges, becoming more complex as values were established and documented.
Evidence of trade records (7000 BCE)
Defined weights of precious metals used by some merchants were later formalized as coins that were usually issued by states.
Coinage (600BCE-1100CE)
States began to use bank notes, issuing paper IOUS that were traded as currency, and could be exchanged for coins at any time.
Bank notes (1100-2000)
Money can now exist “virtually,” on computers, and large transactions can take place without any physical cash changing hands.
Digital money (2000 onward)
Early trade involved directly exchanged items – often perishable ones such as a
COW.
Barter (5,000 BCE)
Scribes recorded transactions on clay tablets, which could also act as receipts.
Sumerian cuneiform tablets (4,000 BCE)
Used as currency across India and the South Pacific, they appeared in many colors and sizes.
Cowrie shells (1,000BCE)
a mixture of gold and silver was formed into disks, or coins, stamped with inscriptions.
Lydian gold coins (600BCE)
Athenian drachma (600 BCE)
used silver from Laurion to mint a currency used right across the Greek world.
Often made of bronze or copper, early Chinese coins had holes punched in their center.
Han dynasty coin (200BCE)
Bearing the head of the emperor, these coins circulated throughout the Roman Empire.
Roman coin (27BCE).
Early Byzantine coins were pure gold; later ones also contained metals such as copper.
Byzantine coin (700CE)
This 10th century silver penny has an inscription stating that Offa is King (“rex”)
Of Mercia.
Anglo-Saxon coin (900CE)
Many silver coins from the Islamic empire were carried to Scandinavia by
Vikings.
Arabic dirham (900CE)
The Spanish discovered silver in Potosi, Bolivia, and caused a century of inflation by shipping 350 tons of the metal back to Europe annually.
Potosi inflation (1540-1640)
England’s Henry VIII debased the silver penny, making it three-quarters copper. Inflation increased as trust dropped.
The great debasement (1542-1551)
Company of Merchant Adventurers to New Lands
Early joint stock companies (1553)
was created as a body that could raise funds at a low interest rate and manage national debt.
Bank of England (1694)
Isaac Newton became Warden and argued that debasing undermined confidence. All coins were recalled and new silver ones were minted.
The Royal Mint (1696)
The Continental Congress authorized the issue of United States dollars in 1775, but the first national currency was not minted by the US Treasury until 1794.
US dollar (1775)
The British pound was tied to a defined equivalent amount of gold. Other countries adopted a similar Gold Standard.
Gold Standard (From 1844)
enabled consumers to access short-term credit to make smaller purchases. This resulted in the growth of personal debt.
Credit Cards (1970s)
The easy transfer of funds and convenience of electronic payments became increasingly popular as internet use increased.
Digital Money (1990s)
Twelve EU countries joined together and replaced their national currencies with the Euro. Bank notes and coins were issued three years later.
Euro (1999)
a form of electronic money that exists solely as encrypted data on servers – is announced. The first transaction took place in January 2009.
Bitcoin
Prior to the coming of the Spanish in 1521, the Philippine was already trading with neighboring countries such as China, Java and Macau. Through the prevailing medium of exchange was barter, some coins were circulating in the Philippines as early as the 8th century.
Commodity money such as gold, gold dust, silver wires, coffee, sugar rice, spices, carabao were used as money. Between the 8th and 14th century the penniform gold barter rings were predominantly used by were predominantly used by foreign merchants.
Piloncitos and other commodities were in circulation. Sed by foreign merchants.
Pre-Spanish Regime
The Spanish introduced coins in the Philippines when they colonized the country in 1521. Silver coins minted in Mexico were predominantly used in 1861, the first mint was established in order to standardize coinage.
Spanish Regime
After gaining independence in 1898 when Spain ceded the Philippines to the United States. The country’s first local currency, the Philippine Peso, was introduced replacing the Spanish-Filipino Peso.
The Philippine National Bank was authorized to issue Philippine Bank Notes.. Later, the Bank of the Philippine Island was authorized to issue its own bank notes. These notes were redeemable by the issuer but not made legal tender.
American Regime
When the Philippines was occupied by Japan during World War II, the Japanese issued the Japanese War Notes. There bills had no reserves nor backed up by any government asset and were called “mickey mouse” money.
Japanese Regime
The narrowest measure of the money supply. It includes currency in circulation held by the nonbank public, demand deposits, other checkable deposits, and traveler’s checks. M1 refers primarily to money used as a medium of exchange.
M1
this measure includes money held in savings deposits, money market deposit accounts, noninstitutional money market mutual funds and other short-term money market assets (e.g., “overnight” Eurodollars). M2 refers primarily to money used as a store of value.
M2
this measure includes the financial institutions, (e.g., large-denomination time deposits and term Eurodollars). refers primarily to money used as a unit of account..
M3
All japanese currency in the ph declared illegal
Post-war period
this measure includes liquid and near-liquid assets (e.g., short-term Treasury notes, high-grade commercial paper and bank
L
responsible for determining the supply of money. It uses daily open market operations to influence the creation of money by banks and to guide the availability of money in the economy.
Bsp
Money demanded for day-to-day payments through balances held by households and firms (instead of stocks, bonds or other assets). This kind of demand varies with GDP; it does not depend on the rate of interest.
Transaction demand
Money demanded as a result of unanticipated payments. This kind of demand varies with GDP.
Precautionary demand
Money demanded because of expectations about interest rates in the future. This means that people will decide to expand their money balances and hold off on bond purchases if they expect Interest rates to rise.
Speculative demand
is the price paid in the money market for the use of money (or loans). The rate is a percentage of the amount borrowed.
The rate of interest
The rate of interest balances the demand for funds (required for investment) and the supply of funds (from savings). If investors can earn a 10 percent return on a capital investment project (e.g., building a factory), they will be willing to pay a rate of interest of up to 10 percent. Households delay consumption by saving (and are rewarded by earning interest) depending on their time preference and the rate of interest. Savings percentages can differ significantly from one nation to another.
Investment fund
Households and businesses may have reasons to hold assets in liquid form (i.e., readily available money). Because borrowers immediately), they are willing to compensate lenders for giving up require cash in the long-term (that doesn’t need to be repaid to the lender liquidity. Keynes introduced the influence of the liquidity preference’ the interest rate. The classical economists, who considered investment funds as the critical market for the interest rate, disregarded the topic of
Liquidity preference.
Liquid assets
is the real price one must pay for earlier availability
The pure interest component
reflects the expectation that the loan will be repaid with pesos of less purchasing power as the result of inflation
Inflammatory premium component
reflects the probability of default (the risk imposed on the lender by the possibility that the borrower may be unable to repay the loan).
The risk premium component
are relevant for loans with a relatively short length for repayment while long-term interest rates on the other hand, are relevant for loans such as long-term corporate borrowing and 10-20-30 year fixed rate mortgages.
Short term interest rate
Higher interest rates make loans less affordable, while high interest on savings accounts encourages saving rather than spending. As spending slow, so does the economy, with demand for goods and services decreasing. This eventually effects business and employment levels.
WHEN INTEREST RATES ARE RAISED
In the macroeconomic short-run, some prices (e.g., wage rates affected by labor contracts) will be inflexible. This causes economic fluctuations, with real GDP either below potential GDP (recessionary gap) or above potential GDP (inflationary gap).
The impact of money
holds that changes in the money supply MS directly influence the economy’s price level, but nothing else. This theory follows from the equation of exchange: M × V = P × Y
The quantity theory of money
cost of using money over time
Interest
- based on a commonsense notion that a peso of cash flow paidto you one year from now is less valuable to you than a peso paid to you today.
Present value of money
the simplest kind of debt instrument where the lender providesthe borrower with an amount (called the principal) that must be repaid to the lender at the maturity date along with an additional payment for the interest
Simple loan
Interest rates link the future to the present. It allows individuals to
evaluate the present value (the
value today) a future income and costs. In essence, it is the market price of earlier availability.
Interest rates
are determined by the interaction between the demand for and supply of loanable funds.
Interest rates are determined
the interest rate before taking inflation into account
Nominal interest rate
equals the observed market interest rate adjusted for the effects of inflation.
Real interest rate
Characteristics of money
- Store value
- Item of worth
- Means of exchange
- Unit of account
- Standard of deferred payment
