Money, Banking System, and Monetary Policy Flashcards
the system of using money as a means of valuation and of
exchange –evolved over time slowly.
Monetary standards
Many countries today are on some kind of ______
floating
exchange rates.
Few currencies are fixed in value relative to some major currency
although the _______ of many countries try to keep the value of the national
currency relatively stable.
monetary authorities
_________ evolved from one that was tied to the US dollar in a
fixed way as a dollar exchange standard.
The Philippine monetary standard
Upon independence, the government moved into
a managed currency, in which the value of the peso was tied to _________ determined
by the central bank.
exchange rates
With the collapse of the ________, the Philippines moved
into the management of a floating exchange rate system.
Bretton Woods system
________ depends on the operations of the demand and supply for Philippine currency, measured in
terms of the US dollars, in daily trading undertaken in the Philippine exchange rate markets.
The floating exchange rate system
Functions of Money (4)
- As a unit of account
- As a medium of exchange
- As a standard of deferred payments
- As a store of value
Kinds of money (2)
Commodity money
Fiat money
money that has intrinsic value; it would be valued even if it were not used as money (e.g. gold, cigarettes)
Commodity money
money without intrinsic value that is used as money because of government decree (note: fiat in latin is “let it be done”
Fiat money
Motives of Holding Money
- Transactions motives
- Precautionary motives (for contingency reason)
- Liquidity motive (speculative demand for money)
Liquidity preference – asset holding for money
Liquidity motive
(speculative demand for money)
Liquidity preference
– asset holding for money
Determinants of Money Demand or Demand for Real Money
Balances (L)
- Interest rate (i)
- Real income and wealth (Y)
- Price index (P)
- Tastes and preferences of the wealth-holders
Formula for demand for real money balances (L)
L = f (i, Y); L α 1/i ; L α Y
Nominal money demand versus real money demand
Real Money Demand (Lr) = Nominal demand for money (Ln) / Price index (P)
Definition of Money Supply
The money supply is managed and regulated/controlled by the
Central Bank
assets that have the property of liquidity
money
M1 = ?
Cash + Checking Deposits (narrow money or transactions money supply)
M2 = ?
M1 + Savings and Time deposits (broad money)
M3 = ?
M2 + Other deposit substitutes
examples: debt instruments; bonds; stocks; land titles
a law was passed creating the Central Bank of the Philippines (CBP)
1948
the CBP was formally opened for business
1949
the Bangko Sentral ng Pilipinas was established as the central monetary authority
1993
the CBP was restructured into its successor institution, the BSP
1994
exercises the powers and functions of the BSP
(e.g. conduct of monetary policy
and supervision of the financial system
The Monetary Board
the chief executive officer of the BSP
BSP Governor
Composition of the Monetary Board
7 members
Primary objective of BSP
maintain price stability; promote monetary stability and the convertibility of the peso
Characteristics and activities of the BSP and the Central Bank in general
a) Publicly-owned
b) Bank of currency issue and ultimate source of money (the supplier of money)
c) As government’s banker, agent and financial adviser
d) Banker’s bank
e) Lender of last resort
f) Custodian of the country’s reserves of foreign currencies
g) Regulation of monetary and financial activities (as a money manager)
Tools used by the Central Bank to Regulate/Control Money Supply
- Exercise of fiat authority to issue paper money
- Reserve requirement ratio
- Discount rate & Discounting bills
- Rates of interest on government funds
- Open market operations
- Moral suasion
for banks in need of additional liquidity
Discount rate
buying a particular asset (e.g. a negotiable asset)
at less than its face value
Discounting bills
can set or regulate the rate
of interest (e.g. overnight transaction clearing;
treasury bills)
Rates of interest on government funds
the buying and selling of government securities in the financial capital market
Open market operations
