1. Money, Central
Banking, and
Monetary Policy

2. WHAT IS MONEY?
Money refers to all things that are generally
acceptable as a means of payment for good
and services (medium of exchange) and as a
payment.

3. What are the functions of money?
 Money as a unit of account means that the value of goods and services are
store and services are expressed or quoted with the use of a single item,
usually a country’s currency.
Money as a medium of exchange means that you can trade your money in
the market and in return, get the goods and services that you want to
purchase because money is generally accepted as a means of payment.
The prerequisite of the barter system is called the double coincidence of
wants.
Money as a store of value or standard of deferred payment means that you
can keep or save money now and then spend it at a future date because its
capacity to buy the same amount of goods and services is not lost or
diminished over time.

4. EVOLUTION OF MODERN PAYMENT
SYSTEM IN THE PHILIPPINE
From a period of autarky or no trade system where the
much older generation of Filipino families produced
commodities for their own consumption, the mode of
transaction often cited was the barter system.
Followed by the use of commodity money were people
used commodities such as salt, carabao, shells that serves
as a medium of exchange.

5. Face value refers to the amount of goods and service that
can be bought with the use of the paper bills.
Example: if you have a one thousand peso bill, then
it is possible for you to purchase goods and services worth
of a thousand pesos at the maximum.
Specialized bankers offered businessmen and traders the
particular service of safekeeping their surplus money for a
fee. Overtime, bankers discovered that they can also lend a
portion of the traders’ surplus money to other people who
needed funds and then charged as an interest in return.
With the vast developments in commerce and industry, the
system of fractional reserve banking also evolved.

6. The Demand of money
The demand for money for real balances or purchasing power, i.e.,
the amount of goods and services money can buy.
According to John Maynard Keynes, there are 3 motives for holding
money:
Transaction motive refers to the holding of money to enable
people and firm to pay off their daily transaction such as paying for
electricity, telephone bills, house rent, education, food, clothing,
etc.
Precautionary motive for holding money arises because
household and firms cannot predict exactly their level of
expenditure per unit time and the inflow of income as well.
Speculative or portfolio allocation motive refers to the holding of
money for purpose of taking advantage of market opportunities.

7. The Supply of money
The supply of money may be viewed in terms of monetary aggregates:
M1 – this refers to the narrow definition of money which consists of currency
(e.g., paper bills and coins) in circulation plus demand or checking deposits;
M2 – this refers to M1 plus savings and small time deposits;
M3 – this refers to money supply, peso savings, time deposits, plus deposit
substitutes of money-generating banks, and negotiable order of withdrawal
(NOW) accounts.
RM – this is the reserve money which represents liabilities of the BSP to the
public sector in the form of currency in circulation and to banking sector in
the form of cash reserve.
Money supply is determined by the behavior of three principal
actors—the public, the bank, and the BSP.

8. THE ROLE OF MONETARY INSTITUTIONS IN THE
ECONOMY
The Bangko Sentral ng Pilipinas
The Central Bank of the Philippines (CB) was established on June 15,
1948 by virtue of Republic Act No.265. Its primary objectives then were:
a) To maintain the monetary stability in the country;
b) To preserve the international value of the peso; and
c) To promote rising level of production, employment, and real income in the
Philippines.
On June 14, 1993 , through R.A. 7653, the Bangko Sentral ng Pilipinas (BSP)
was put up as a central monetary authority. Its primary objectives were
still to maintain price stability (or fight inflation) conductive to a balanced
and sustainable growth of the economy as well as promote and maintain
monetary stability and convertibility of the peso.
BSP likewise called lender of the last resort. From whom ailing or bankrupt
banks can borrow if other banks in the financial system cannot provide
them with the necessary funds.

9. Financial Institutions
The Philippine financial or monetary system is a network of markets
and institutions that transfer funds from individuals and groups
who save money to individuals and groups who want to borrow
money.
Banks Classified as:
a) universal and commercial
b) rural bank
c) thrift bank – which include:
1. Savings and mortgage banks
2. private development banks
3. microfinance institutions
4. stock savings
5. loan associations

10. Non banks institutions are:
a) contractual savings institutions – such as:
1. Insurance companies
b) Investment institutions
c) Securities market institution
1. Securities brokers and dealers.
2. Lending investors
3. Organized exchanges
d) Credit card companies
e) Pawnshops

11. Distribution and classification of banks in the Philippines
0.20%
1.60%
3.30%
9.10%
14.20%
48.20%
Universal and Comercial Banks
Rural Banks
Thrift Banks
Savings Banks
Private Development Banks
23.50%
Stock Savings and Loans Associations
Micro Finance

12. Number of Banks and Non-bank Institution in the Philippines in 2008
25,000
22,595
20,000
14,747
15,000
10,000
7,848
5,000
0
Total
Banks
Total
Banks
Non-banks
Non-banks

13. Financial Institutions
Financial or monetary institutions are important
because of the following major roles:
a) they allocate or channel saving efficiently
from savers to borrowers.
b) they provide information, liquidity, and risksharing services.
c) they provide flexibility and divisibility of
funds for the users and sources of this funds
d) they are essential for ensuing capital
formation and economic growth.

14. Simple Money Creation
Bank
Deposit
Required Reserves
Funds Available For
Lending
ZEST
10,000
1,000
9,000
GOLDEN RULE
9,100
900
8,100
PATIENCE
8,100
810
7,290
.
:
TOTAL, FIRST 3 BANKS
.
:
27,100
.
:
.
:
2,710
.
:
.
:
24,390
.
:
.
:
OTHER BANK’S RETURN
72,900
7,290
65,610
GRAND TOTAL
100,000
10,000
90,000

15. SIMPLE MONEY CREATION
Money Multiplier is the factor by which money supply
will change given a change in monetary base o given
a change or deposit.
Formula of the Money Multiplier:
mm = 1 / rr
Formula of the Change in Money Supply:
M = mm x MB

16. MONETARY POLICY
Monetary Policy can either be expansionary (increasing money supply) or
contractionary (decreasing money supply)
The following is a list of important instruments of monetary control used by the
Monetary board:
a) Reserve requirement – is the percentage of deposits that banks are mandated to
keep in their vaults for safekeeping by the BSP.
b) Rediscount Rate – is the interest charged by the banks to wish to borrow from it.
c) Open Market Operation – in simplistic terms, refer to the buying and selling of
government securities by the BSP. Open market purchase, means buying of
government securities (e.g., bonds) from private individuals or firms by the BSP.
Open market sale refers to the sale of government securities to private individials or
firms by the BSP.

17. INTERNATIONAL MONETARY
INSTITUTIONS ABD THE PHILIPPINE
MONETARY SYSTEM
Even prior to financial liberalization and globalization
of markets in the recent past, the Philippine monetary
system has been affected by international monetary
institutions particularly by the International Monetary
Fund (IMF) and the World Bank (WB).
International Monetary Fund was created to:
a) Act as lender of last resort;
b) Encourage domestic economic policies
consistent with foreign exchange rate stability; and
c) Monitor the financial activities of member
countries.

18. World Bank was also created to:
a) To make a long term loans available for developing countries
b) Give loans for infrastructure to aid economic development
c) Sell bonds in international capital market to raise loanable funds.
Composed of five (5) institutions:
1. International Development Association (IDA)
2. International Bank for Reconstruction and Development (IBRD)
3. International Finance Corporation (IFC)
4. Multilateral Investment Guarantee Agency (MIGA)
5. International Center for Settlement of Investment Disputes (ICSID)
The World Bank also encourages member counties to give priority to programs for
good governance and transparency, environmental protection and sustainable
development. These programs are envisioned as potential solutions to eradicate
poverty in member nations.