Midterm Flashcards
It is a general statement that describes the causes of changes in financial variables, such as money supply and interest rates, and the effects of these changes, changes in variables, in the real sector, such as employment, production and prices.
Monetary theory
It refers to the amount of goods or services which will be given in exchange for a unit of money.
The Value of Money
It is synonymous with its power to purchase economic goods.
The Value of Money
Prices and the value of money are, thus, ___.
Related
As abrupt changes in the value of money affects the economy, the government finds it necessary to manage the ___. The need for an effective ___ follows. ___, however, is formulated based on some theories about money.
monetary system
Monetary Policy
important theories about money are:
- The Quantity Theory of Money
- The Income Theory
- The Transactions Theory, and
- The Cash-Balance Theory
It is “a theory that states the relationship between the quantity of money in an economy and the price level.’
The Quantity Theory of Money
When the other factors are constant, a change in the quantity of money will result in proportional changes in the price level.
The Quantity Theory of Money
If, for instance, money is increased by 20 percent during a period, prices would be expected to rise by an average of 20 percent also.
The Quantity theory of Money
It was first developed in the late 1500s when money was primarily a medium of exchange used to purchase commodities. If there is more money in circulation, more spending will be made, and with less money, less spending.
The Quantity Theory
It suggests that inflation can be controlled by the monetary authorities through control of the quantity of money in circulation. Thus, if a certain rate of growth in gross national product is anticipated, this can be achieved without inflation by allowing the quantity of money in circulation to increase proportionately.
The Quantity Theory of Money
Formula of Quantity Theory
P = MV/T
P =
The Price level
M
the amount of money in circulation
V=
the velocity of circulation or the rate of money turnover
is that money which is being used to finance transaction, as opposed to idle or inactive money.
The Money in Circulation
It refers to the rate at which money circulated through the economy in order to finance transactions.
The Velocity of Circulation
T =
total volume of trade
Formula for Velocity
V = Y/M
Y
W
M =
the money supply available in the economy for a specified period (Usually 1 year)
V =
the money value of national income over that period.
It is an expression of a belief by some economists about the relationship between income and money.
The Income Theory
They thought that “changes in the value for money or price levels” but through the interaction of the various aggregates like income, investments, savings and consumptions.
The Income Theory
The theory recognizes that one person’s spending is another’s income and in analyzing the value of money, one must focus on the factors that affect income and spending in the economy.
The Income Theory
This simply means that a person with an income will have a means to spend, and when he does, somebody is provided with an income, who in turn, is in a position to spend and provide another with an income.
The Income Theory
This will bring us the need for a brief understanding of the aggregates composing the national income.
The Income Theory
It refers to the value of income form the sales of goods and services in a country.
National Income
It includes not only the income which arise from production within the economy, but also income which accrues to domestic residents from activities carried on abroad.
National Income
National Income can be calculated in 3 ways
As the value of the outputs of all goods and services in the economy, net of indirect taxes and subsidies, and corrected for inter-industry sales so as to avoid double-counting.
As the total flow of incomes paid out to households in return for the supply of production services, plus profits retained by firms as reserves.
As the sum of expenditures on consumers’ goods and investment goods, government expenditures, and expenditures by foreigners on the nation’s exports less domestic expenditures on imports.
It is the expenditure on real capital goods which refer to physical goods.
Investments
Investments does not include the following:
Investments of commercial banks and other financial institutions in terms of purchases of securities; and
Purchases of existing capital goods like a seven year old school building
For purposes of national income analysis, __ will mean spending for new capital goods like constructing a new school building.
Investment
It will result to increased income for construction workers who will build the facility. It will also result to income producers of school supplies, publishers of books, and printers of enrollment forms and class cards.
Investment
As __ expenditures fluctuate, some tools of monetary policy must be used by the central monetary authority to influence the total amount of such expenditures.
investment
It refer to the part of income not spent on consumption.
Savings
It represent money which, having been paid out as income to households by business firms or the government is not returned to them in the form of expenditure on goods and services
Savings
It refers to the total expenditure in an economy on goods and services which are used up within a specified, usually short, period of time, generally a year.
Consumption
This expenditure will include consumer goods and services, as well as raw material and other inputs used in the production process.
Consumption expenditures
Changes in the consumption expenditures are affected by the ff:
Changes in the holdings of money by the individual members of the public;
Changes in the availability of credit and the effective rates of interest;
Changes in the perception of the consumers regarding their current purchasing power.
It is a circular flow of income with business firms and consumers as the main propellers.
The income stream
Businesses provide income to consumers in the form of:
Wages Interest Rent Dividends Royalties
When consumers receive income, they are faced with two options:
To spend on consumption
To save
Circular flow of income
Business firms pays investments then provide Income payments wages, rent, interest, royalty, dividends to consumers which serves as consumption to business firms
It indicates that the value of money is determined by the forces of supply and demand over a period of time, rather than at a given time in a given market.
The transactions approach
The approach focuses on the spending of money
The transactions approach
The proponent of the transactions approach, ___, agrees that “one of the normal effects of an increase in quantity of money is an exactly proportional increase in the general level of prices.”
Irving Fischer
The foregoing statement, according to Fischer, hinges on three assumptions, the validity of which confirms the validity of the quantity theory:
That changes in the quantity of money do not affect velocity;
That changes in the quantity of money do not affect the volume of transactions;
The chain of causation run from money to prices and not in the other direction.
It is a version of the quantity theory of money that focuses on the demand for money.
Cash-balances approach
The approach relates determination of the value of money to the motives and decisions of individuals holding money.
Cash-balances approach
It involves the manipulation of financial variables by the central monetary, authority in order to achieve the economy’s ultimate goals of full employment and balanced economic growth, at stable prices.
Monetary policy
It is viewed as an instrument to stabilize the economy.
Monetary policy
It is a major instrument of macroeconomic policy, which government conducts through the management of the nations money, credit and banking system.
Monetary policy
___use various tools to implement monetary policy. These tools are as follows:
Central monetary authorities
Open market operations
Discount policy
Reserve requirements
It refer to the central bank’s activity of buying or selling of government securities in the open market.
Open market operations
This tool is used to effect changes in interest rates.
Open market operations
Open Market Operations consists of two types as follows:
Dynamic open market operations
Defensive open market operations
those which are intended to change the level of reserves and the monetary base
Dynamic open market operations
those which are intended to offset movements in other factors that affect reserves and the monetary base.
Defensive open market operations
It is a tool used by the Bangko Sentral ng Pilipinas(BSP).
Open Market Operations
This activity is made possible through the sate of BSP holdings of Treasury securities.
Open market operations
Open market operations have the following advantages over the tools of monetary policy:
The BSP has complete control over the volume of transactions. The BSP demonstrated that power once when it partially rejected some bids for its T-bill offerings to arrest an abrupt appreciation in the yields of such financial instrument.
They are flexible and precise and can be used to any extent. If only a small change in reserves or monetary base is required, the central bank can achieve it with small sale or purchase of securities. If a big change is needed, a large sale or purchase is made.
Mistakes can easily be corrected if the central bank feels that the rate of government securities purchased is too low, it can reverse the error by conducting open market sales.
The implementation of open market operations can be made quickly, involving no delays in administration. To change the monetary base or reserves, the central bank will just place orders with securities dealers, and the transactions are effected immediately.
The central bank lends money to ___. The interest rate charged to the borrowers is called the ___
discount rate
depository institutions
Any increase in the discount loans __ to the monetary base and results to an ___ money supply.
Adds
Expanded
Any decrease in discount loans ___ the monetary base which results to a __ money supply.
Reduces
Reduced
The volume of discount loans granted may be achieved by the central bank through any of the following measures:
By affecting the discount rate
By affecting the quantity of the loans
It refer to the regulation making it obligatory for depository institutions to keep a certain fraction of their deposits in accounts with the central bank exercise more precise control over the money supply.
Reserve requirements
Effects of the discount policy:
Discount policy
Discount loans (Any increase, Any decrease)
Any increase results to bigger monetary base and expanded money supply
Any decrease results to a smaller monetary base and shrinking monetary base
Monetary policy is not an end in itself, rather, it is a means to various ends. These ends are called ___
The goals consist of the following:
goals of monetary policy High employment Economic growth Stable prices Interest-rate stability Stability of financial markets Stability in foreign exchange markets
It is used to attain high employment.
Monetary policy
It prevents the ill effects of high unemployment.
High employment
It refers to “the steady process of increasing productive capacity of the economy, and hence of increasing national income.”
Economic growth
It is usually measured as the annual rate of increase in the nation’s real gross national product (GNP).
Economic growth
It is derived when inflation is incorporated in computing for the value, at current market prices, of all final goods and services.
Real GNP
It maintains the idea that “price stability supports growth because it allows households and businesses (including export enterprises) to plan ahead and arrive at better informed decision about their consumption, investment, savings, and product needs.”
The Department of Economic Research of the Bangko Sentral ng Pilipinas
It is a desirable feature of a growing economy.
The stability of interest rates
When interest rates ___, it creates uncertainty among decision-makers and they find it hard to decide on which moves to make.
fluctuate
One of the important goals of monetary policy is the ___ in which financial crises are avoided.
promotion of a more stable financial system
It asserts that the implementation of a sound monetary policy leads to the creation of a more stale and stronger banking system.
The Bangko Sentral ng Pilipinas
To effectively implement a sound monetary policy of the Financial Stability Coordination Council was launched in ___by five Philippine government institutions which aims to foster a strong and resilient financial system that supports market innovation and mitigate any build-up of systemic risks
February 2014
Financial Stability Coordination Council Represented in the council are:
Insurance Commission Department of Finance Bangko Sentral ng Pilipinas Securities and Exchange Commission Philippine Deposit Insurance Corporation
Stability in a Foreign Exchange Markets
What happens to foreign exchange markets affect the value of the Philippine peso.
A desirable goal of monetary policy is to keep the value of the peso as stable as possible in foreign exchange markets.
It indicates a negative undertaking that must be set aside if one wants to move forward.
Credit
The sad experience of many persons who provided credit is enough to discourage the uninitiated. This happens because many people look upon the availment of credit as a solution to their current financial difficulties, never mind the repayments required.
Credit
Aware of the possibility of financial ruin for one who extends credit, we may conclude that credit must be excluded from the economic activities of man. In spite of this fear, however, __ remain to be an important means for the upliftment of the economic standing of many people including, those of many nations.
Credits
When the economic activities cannot be pursued vigorously because of lack of capital, the economic growth of any country will be limited. Businesses which are short of capital may not be able to produce at the most economic level of quantity. In the same light, households which at the moment do not have sufficient funds to purchase goods will have to forego consumption for a while. Even if these households are able to make purchases schedules of firms.
The provision of credit to qualified individuals and firms minimizes the ill-effects of the above mentioned scenarios. Business and households will be provided with the power to produce and consume at the precise moment when they are needed.
It is used heavily by even the most progressive nations. It appears that their respective economies cannot be sustained for long without the use of credit. Most of them, shown on the table in the next slide, even avail of opportunities for borrowing from other countries.
Credit
It is the amount of debt a country owes to foreign or international creditors
External debt
The estimated Philippines foreign debt under the Aquino Administration in early 2016 was___
₴70 (US₴70 billion).
It is the total amount of debt a central government or country owes.
Public debt
It is also known as national debt.
Public debt
•The estimated Philippines public debt under the Aquino Administration was ___ in early 2016.
₴163,934,972,678
It can be government, corporations or citizens o that country.
Debtors
Public debt per person:
•Population:
•Public debt as %GDP:
•Total annual debt change:
₴1,515.28
109,805,464
45.8%
8.4%
Is the 33rd largest in the world, according to 2016 International Monetary Fund statistics, and is one of the largest economies in the ASEAN.
Economy of the Philippines
__ is also one of the emerging markets.
__ is considered a newly industrialized country, which has an economy transitioning from one based on agriculture to one based more on services and manufacturing. In 2016, GDP by Purchasing power parity was estimated to be at ₴811.726 billion.
Philippines
It is the monetary value of total finished goods produced and services provided in a country during one year.
Gross Domestic Product
It maybe defined as the power or ability to obtain goods or services in exchange for a promise to pay for them later.
Credit
The terms “___” refers to the power of the prospective debtor rather than that of the creditor, although that power will only be realized if the debtor is accommodated by the creditor .
Credit
When a ___is consummated, the amount involved will be recorded as asset on the balance sheet of the creditor and as liability on the balance sheet of the debtor.
credit agreement
It refers to that power of a person to obtain goods or services without the requirement of paying for them immediately upon delivery.
Credit
It in the hands of a power may or may not be used. When that power is used, the person who used it is now obligated to pay a certain amount of money at a stipulated date that amount or any remaining portion of the original amount is called “___”.
The credit power
Debt
__ refers to power, while __ refers to obligation. When credit is availed of the result is debt.
Credit
Debt
The measurement of ___ serve some purposes when computed on a national scale. The ___ is an important data used in the formulation of monetary policies by the government.
credit volume
national credit volume
It refers to any material or physical thing that satisfies a human want provided that is limited in amount.
Wealth
Wealth includes the following:
Residential building Motor car Farm equipment Books Watch Jewelry
Credit is used by the following general groups:
Consumer
Business and;
Government
It is oftentimes made possible by purchases of goods and services on credit.
Household Consumption
The following are examples of goods bought on credit by consumers:
House and lot Motor vehicle Household appliances Educational services Travel Wedding expenses Clothing and jewelry
They are users of credit in large amounts.
Businesses
It will be extremely difficult to find a business, big or small, without debts of some kind businesses avail of credit to finance the following:
Payroll Purchase of merchandise Construction of building and facilities Purchase of equipment Refinancing of maturing debts
Even ___that provide credit are also users of credit
financial institutions
Kinds of Credit
Consumer credit Trade credit Bank credit Investment credit Agricultural credit Export credit Public credit
Refers to credit given by shops and other financial institutions to consumers so that they can buy goods.
Consumer credit
Is a credit offered by a company when trading with another.
Trade credit
__ in the book of accounts of the creditor as accounts or notes receivable.
Trade credit
Refers to all types of lending granted by the banks to other or to one another.
Bank credit
Among the types of loans availed by borrowers from banks are:
Commercial loans Real estate loans Agricultural loans Industrial loans Salary loans Automotive loans Deposits collateral loans Interbank call loans
Refers to that type of credit required by businesses and government to finance the construction and operation of certain project.
Investment Credit
Also used for the fixed and working capital of businesses, for projects undertaken by local, provincial and national government, and for the purchases and improvement of the real estate.
Investment credit
Refers to loans used to finance production and marketing of agricultural products.
Agricultural credit
This includes lending of funds for the purchase of farm equipment and machinery, fertilizers, pesticides and seedlings, fingerlings and others.
Agricultural credit
Refers to credit extension provide to foreign buyers of local goods.
Export credit
The various ways of extending credit to foreign buyers are:
Letter of credit
Documentary bills
Open account
Refers to loans extended to the government whether at the national, provincial, or municipal level.
Public credit
Basis of credit
Character Capacity Capital Collateral Condotion
This refers to the personal integrity of the borrower.
Character
His determination to pay can be evaluated by his pass record
Character
It measures a borrower’s ability to repay a loan by comparing income against recurring debts.
Capacity
This has something to do with the borrower’s capacity to pay.
Capacity
This refers to the resources owned by the borrower such as properties with such properties the ability of the borrower to obtain credit has become bigger.
Capital
Usually the title of the land is required as a security of the loan.
Collateral
This is a safety measure for the payment of the loan.
Collateral
Buildings, machines and other valuable properties are can use as ___.
collateral
__in the community industry or the whole economy affect the ability of borrowers to pay their loans.
Conditions
In determining the credit rating of prospective borrower, various SOURCES OF CREDIT INFORMATION may be availed. These are the following:
Interview with the Applicant Credit
Credit rating Agency
Lender’s own record
Financial statements
In the borrowing process, the loan applicant is normally required to accomplish a loan application. This document contains important basic information about the applicants. With the use of the applicants; the credit evaluator will be able to form some opinion about the creditworthiness of the applicant. If the evaluator wants to validate his initial impressions, ___
Interview with the applicant
Is a company that assigns credit ratings, which rate a debtors ability to pay back debt by making timely interest payments and the like hood of default. An agency may rate the credit-worthness or issues or debt obligations, of debt instruments.
Credit rating agencies
There are times when a supplier of goods does business with a buys for an extended period. This may be enough for the buyer to establish reputations as a responsible client. This experience may be used the supplier as a basis for extending credit to the buyer.
Lender’s own record
Is a formal record of the financial activities and position of a business, person or other entity.
Financial statement
Financial statement consisting of the following:
Balance sheet
Income Statement
Cash Flow Statement
Equity Statement
A balance sheet is also referred to as a ___
Statement of Financial position
It reports on a company’s assets, liabilities, and owners equity at a given point in time.
Balance sheet
An income statement is also known as a ___,
Statement of Comprehensive income
It is a statement of revenue and expenses, profit and loss report, reports on a company’s income, expenses, and profits over a period of time.
Income Statement
a statement of changes on equity, also known as ___,
equity statement or statement of retained earnings
It reports on the changes in equity of the company during the stated period.
Equity Statement
It reports on a company’s cash flow activities, particularly its operating, investing and financing activities
Cash flow statement
Instruments of Trade Credit
Promissory note
Open book credit
Trade acceptance
It constitutes the bulk of the trade credit.
Open book credit
It is unsecured and it permits the customer to pay for goods delivered to him in a specified number of days.
Open book credit
It is a time draft drawn by a seller upon a purchaser, payable to the seller as payee, and accepted by the purchaser as evidence that the goods shipped are satisfactory and that the price is due and payable.
Trade acceptance
It is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of a specified person, or to the bearer.
Promissory note
Institutional mechanisms established by society to produce and deliver financial services and allocate resources.
Financial System (Rose, Kolari, Fraser)
Consisting of the business firms supplying financial services
Financial System (Rose, Kolai, Fraser)
The instruments, institutions, markets and roles governing, the conduct of trade that expedite the routing of funds from buyers to sellers and from savers to lenders
Financial System (Kaufman)
In which funds are traded between borrowers and lenders
Financial System (Cargill)
Borrowers of Fund
Surplus Unit (borrower)
Supplier of funds
Lenders
Deficit Unit
Functions of the Financial System
CREDIT
PAYMENTS
MONEY CREATION
SAVINGS
Credit is supplied by the financial system to three types of borrowers:
Government
Business
Consumers
Takes the form of currency, checking accounts, and various transactions
Payments
Under modern conditions, the money supply consists of currency (or ___) and deposits (or ___)
Pocketbook money
Checkbook money
This is made through the means of accepting deposits and loan agreements with the use of various financial instruments
Savings
Basic elements of the Financial Statement
- Financial Instruments
- Financial Sector
- Rules Governing the Conduct of Trade
They the evidences of debt that are brought and sold in the market.
Financial Instruments
Consist of money, loans(debts),and ownership shares.
Financial Instruments
It consist of financial markets and financial institutions
Financial Sector
It is a mechanism by which savings in one sector of the economy flows to another sector.
Financial Markets
It is an organization through which funds are assembled and transferred from individuals with surplus funds to other individuals and firms needing extra funds
Financial Institution
Rules Governing the Conduct of Trade
Pertinent laws concerning financial institutions
Memoranda, circulars, and issuances of concerned government agencies
Pertinent ordinances of local government units where the financial institutions is situated;
Customs and traditions inherent to the area where the financial institution is situated
They are two important segment of the economy. Interactions between them drums up economic activity.
Borrowers and Lenders
The services provided by intermediaries in the financial system make the interactions more brisk and productive.
Connecting borrowers with lenders
The needs of households are from ____
day-to-day, month-to-month and year-to-year
