Money & Monetary Policy

7/31/2019 Money & Monetary Policy

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CURRENT GNPVS

REAL GNP


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Current GNP

-present/nominal GNP value

Real GNP

- GNP value using a PRICE INDEX/GNP deflator.


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REAL GNP = CURRENT GNP

PRICE INDEX


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PRICE INDEX IS COMPUTED

USING THE INFLATION RATE

INFLATION RATE =

CPI B CPI A

CPI A X 100


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To get the price index for the 2nd year : multiply 1(PI

of year 1) by percentage of inflation rate year 2then add /subtract the product to /from 1(Base

Year Price Index)

Base Year Price Index is always

equal to 1.

To get the price index for the 3rd year : multiply the

PI of year 2 by percentage of inflation rate of year

3then add /subtract the product to /from 1( PriceIndex of Year 2)


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Current GNP Inflation Rate Price Index Real GNP100 B 1 100B110 B 5% 1.05 104.76B120 B 10% 1.15 104.35B130 B (10%) 1.03 126.21B140B 20%154B 10%160B 10%144B (10%)


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MONEY &

MONETARY POLICY


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If economics is the dominant sphere ofpeoples lives, at the heart of economics ismoney.

WHEN MONEY TALKS, EVERYBODY

LISTENS

WHAT WE DONT KNOW ABOUTMONEY CAN HARM USMEANING OF MONEY SHOULD BE WELL UNDERSTOOD.


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Net-Worth is

NEVER Equal to Self-Worth.Neale Godfrey


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-An economic tool (medium of exchange)- A social tool(money is at the heart of every

relationship)

- A political and even a spiritual tool(samemoney paid as a bribe can be the same

money donated to charity)

Money is a TOOL

Money is always an issue.


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THE VALUE OF MONEY, REAL &

SYMBOLIC, AS A MEDIUM OFFAIR EXCHANGE, CAN BE USED

TO TEACH PEOPLE SOCIAL

VALUES.


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Kai(9) & Ren(6) on Managing Money


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-Before money was invented, it was BARTER(highlyinconvenient)

-Shells were one of the first forms of money(AncientChinese).

-Native Americans used beads, Mexicans used beans

-Others used stone rings and red feathers

-600 BC coins(staters) made of mixture of gold and silver

were invented in Lydia-600 AD Chinese people started to use notes

-now every country prints its own paper money

Brief History of Money


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earn or get money

save money

spend money

give or share money


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MONETARY INSTRUMENTS

The control of money supply by the Central Bank

to achieve the desired macroeconomic objectives.

Main Functions of the Central Bank1. Internal & external monetary stability

2. Developing sound credit & exchange conditions


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MONEY SUPPLY

Coins & Bills in Circulation

Demand Deposits

Quasi MoneyDeposit Substitutes


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SOURCES OF MONEY SUPPLY

Central Bank printing of BillsBank Lending Operations

Foreign currency Inflow


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MONETARY INSTRUMENTS

(Short-run Monetary Instruments)Reserved Requirements

Rediscounting

Open Market Operations


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Reserve Requirement

Prescription of minimumratio of reserveto deposit liabilities to

control the creation ofcredit and money.

The higher the RR thelower is the amount ofmoney created.


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Rediscounting - buying of

loan papers at rediscountedvalues

Increasing rediscount rates discouragesbanks from selling loan papers, thereforelowering the amount of money created.


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Open Market Operations-buying

and selling of government

securities in the open market


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Monetary Policies are

instruments to influence

consumption, investments

and savings.(The C & I in GNP Exp. App.)


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A tool utilizing (GE) government

expenditures and taxation as a means to

control the economy.Fiscal Policies are tools to influence

The C + I + G & Net Exports

FISCAL POLICY


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-system of payments required to pay thegovernment to sustain its operation in governance

and provision of public goods.

-taxes decreases the disposable income of theperson and are therefore unwanted/a burden.

-- biggest source of governments income.

-- a tool to manipulate macroeconomic conditions.

TAXATION


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Tax Rate the percentage of tax to be paid.Tax Base the value subject for taxation.Tax Burden the negative effect of taxation.Impact burden of the person who pays the tax

for the first time.Incidence burden of the person who ultimatelypays the tax.

*In direct taxation, impact and incidence fall on the same person,while in indirect taxation, they may fall on different

person

Some Key Words:


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Classification:

Direct Tax- levied on people, paid directly totax agencies.Indirect Taxlevied on goods & services.

Tax Collecting Agencies:BIR internal taxation(IT,CT,RT).

BOC-external taxation(ID,Tariffs)


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Progressive

tax rate increases with tax base.

Regressive tax rate decreases as tax base increases.

Proportional

uniform tax rate on all tax base levels.

System of Taxation:


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Govt Sources of INCOME

Tax Revenues-direct & indirect taxation

Non-tax Revenues

- fees, penalties, income from

govt corporations


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Higher tax rates means lower expenditures orlower demand.

(good during inflationary period)

Lower tax rate means higher demand or higherexpenditures .

Taxation as a Policy


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SURPLUS Budgeting = GE < Income

- decreases MS

DEFICIT Budgeting = GE > Income

- increases MS

- possible thru domestic & foreign debts

GE as a Macroeconomic Policy


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ECO 10 Poster Exhibit

(25% of FINAL GRADE)Grade Scheme: 1st Prize: A

2nd Prize: Am

3rd Prize: BpEconomics & SSCs Triple Thrusts:

-Serving Others

-Saving Earth-Seeking Peace & Pursuing It.

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Money & Monetary Policy

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