Demand for money

1. Transactional demand- exchange

2. Precautionary demand
3. speculative demand
Sample instruments used for transaction,
precautions, and speculation:
ATM card
Credit Card
Time deposit
Dollar Deposit
Checks
Supply of money
M1 – currency in circulation (or currency outside
depository corporations) and peso demand
deposits.
M2 – M1 plus peso savings and time deposits.
M3 – M2 plus peso deposit substitutes, such as
promissory notes and commercial papers (i.e.,
securities other than shares included in broad
money).
M4 - M3 plus other deposits in foreign currency.
Identify which among these instruments is not
considered as part of Money Supply?
ATM card
Credit Card
Time deposit
Dollar Deposit
Checks
Changing money supply
1. reserve requirement
lending capacity may also affect RR
creation of money
- deposit-loans/ lending
With 100B deposit, how much change in money
supply will possibly occur?
reserve requirement=
required reserve ratio x total deposits
excess reserve =
total reserve - reserve requirement
potential deposit creation =
excess reserve x money multiplier
money multiplier =
1/required reserve
Changing money supply
2. Open-market operation
3. Discount rate
How will money supply changes in
the circulation?
1. Reserve Requirement
- private loaning
2. Discount Rate
- bank loaning
3. Open Market Operation
-government loaning
- buying and selling of bonds
 ___ Discount Rate ___
Increase buy Bonds

___ Ms
Decrease ___ Ms
Increase

can change
___ Ir
Increase macroeconomic ___ Ir
Decrease
objectives

__ AD
Decrease __ AD
Increase

Lower Inflation Increase GDP

Monetary Tools / Policy

 Monetary Tools / Policy
– Controlled by central Bank
• Reserve Requirement
• Discount Rate
• Open Market Operation

The use of money and credit controls to influence

macroeconomics outcome
 Monetary Policy
Monetary Monetary
Stimulus Restraint
Increase money supply Decrease money supply

Reduction of Ir of Borrowing Higher of Ir of Borrowing

Increase Investment Decrease Investment

Increase Aggregate Demand Decrease Aggregate Demand

 The Equation of Exchange
MV=PQ Aggregate
where: Demand
P = price of goods
Q = quantity of goods sold in a period
M = money supply
V = velocity of circulation
What will happen to the Aggregate Demand?
1. Government buys bonds.
2. Velocity of Money will decrease.
3. Higher money supply that leads to inflation.
 Summary for Monetary Policy
• Monetary Expansion/ Stimulus
– Decrease RRR
– Decrease Discount Rate
– Buying of Bonds

• Monetary Contraction/ Restraint

– Increase RRR
– Increase Discount Rate
– Selling of Bonds
new industries - prices of farm product fell
and new - workers could not buy goods as fast
methods of as the industry produced them because
production led their wages were low.
to prosperity - workers reduced their spending to
hold down their debts
more people Stock Market Crash
invested in the
- left millions of people in debt
stock market
- stopped making new purchases
- big drop in consumer spending
Installment - nations could not repay their debts
buying - scarce credit
- less borrowing
- lower prices
- more bankruptcies
Box 7, 8, 9, 10
- Stock values plummeted
- stockholders were wiped out
- banks and factories shut down
- millions of Americans were left jobless and penniless
- the banking system had collapsed
- nearly 25% of the labor force was unemployed,
- prices and productivity had fallen
- reduced prices and reduced output
- lower incomes in wages, rents, dividends, and profits
- factories were shut down
- farms and homes were lost to foreclosure, mills and
mines were abandoned
- people went hungry.
- inability of the people to spend or to save
 Monetary Inefficiency
• Reluctant Lenders
• Low Expectation
• Liquidity Trap
• Short- vs. Long-term Rates
• Time Lags
Box 11, 12, 13, 14

- imposed rationing
- recruited 6 million defense workers
(including women and African
Americans)
- drafted 6 million soldiers
- ran massive deficits

Government Expenditure
 Fiscal Policy

change in government expenditure

change in tax
change in transfer payment
Aggregate Demand Affects Production or GDP
Macro Problem: Weak Economy (Unemployment)
Policy Strategy: Fiscal Stimulus
- Increase GE
- Decrease Tax
- Increase Transfer Payment
Macro Problem: Overheated Economy (Inflation)
Policy Strategy: Fiscal Restrain
- Decrease GE
- Increase Tax
- Decrease Transfer Payment
Macro Problem: Weak Economy (Unemployment)
Policy Strategy: Fiscal Stimulus
Fiscal Options Amount

Increase Gov't Purchases Desired FS AD shortfall

multiplier
Cut Taxes DFS
MPC
Increase Transfer DFS
Payments MPC
Macro Problem: Overheated Economy (Inflation)
Policy Strategy: Fiscal Restraint
Fiscal Options Amount

Reduce Gov't Purchases DFR excess AD

multiplier
increase Taxes DFR
MPC
Reduce Transfer DFR
Payments MPC
 The recession in major export markets squeezed
Philippine export revenues. Export receipts from
January to November 2009 contracted by 24.6
percent to 35 billion U.S. dollars, while the industry
sector fell 2 percent. That, combined with the
typhoons Ketsana (0ndoy) and Parma (Pepeng) that
slashed farm production in the fourth quarter and
slowed full year farming, fishery and forestry growth
to 0.1 percent, battered last year's economic
performance.
The official GDP figures, which were released by
the government on Thursday, hit the lower end of the
official target of 0.8-1.8 percent year-on-year growth.
source:http://english.peopledaily.com.cn
How much Fiscal Stimulus is Need?
Year GDP target Expected GDP Gap
In millions Fall In millions
2009 1,654,753 1.8% 29785.56

MPC of the Philippines is=0.835 source:ww.gsid.nagoya-u.ac.jp

 Seatwork
• The government wants to decrease
aggregate demand to P300B to lessen
inflation. If the MPC is 0.90, how much
taxes should be implemented to solve the
inflation? (show your solutions and explain
your answer)