 Is anything that considered as generally

acceptable as payment for the prices of

goods and services and for debts.
 Medium of exchange
 Standard of unit of value
 Store of Wealth
 Standard of deferred payments or Unit of
Account
 Barter System of Exchange
 Use of commodity money as medium of
exchange
 Bimetallic standard
 Gold Standard
 Use of fiat currency
 Commodity money includes tobacco leaves,
precious metals such as silver and gold,
copper, shells, cigarettes and many others.
 Bimetallism – is a monetary system involving
the use of two metals, prominently the gold
and silver.
 There was a free market for those metals and
all other money in circulation were made
redeemable in either gold or silver.
Arguments in favor bimetallism:
 It provides greater monetary reserves
 More stable prices
 Stable exchange rates
 is currency that a government has declared to
be legal tender, but it is not backed by a
physical commodity.
 The value of fiat money is derived from the
relationship between supply and demand
rather than the value of the material from
which the money is made.
 Acceptability-willingness to accept the
money in exchange for goods and services.
 Scarcity – means that the supply of money
should be relatively limited for it to be
valuable. If everyone just have an unlimited
supply of it, the money will lose its value.
 Durability – anything that is used as money
must be able to withstand the wear and tear
when it passed on from one hand to another.
 Portability – the commodity that is used as
money must be handy because individual
need to carry money along.
 Homogeneity – The commodity from which
the money is made must be the same
wherever the money is found.
 Divisibility – means the possibility of a
commodity to be divided into smaller
denominations w/out destroying its value.
 Cognizability – money must be easily
recognized among other things and its value
commonly agreed upon in order not to be
easily counterfeited.
 Malleability – refers to the ability to be
changed into coins or bills of smaller
denominations.
 M1= Currency (paper bills and coins)
 M2 = Demand deposits (cheques)
 M3 = Near-monies (credit/debit cards)

Money Supply = M1+M2+M3

 People hold money for various reasons (John
Maynard Keynes)

 The following motives why people hold

money:
 Transactions motive – to meet day to day
transactions like payments for goods & services
they buy.
 Precautionary motive – to meet unforeseen
events
 Speculative motive – one form of wealth and
assets
 This states that there is direct proportional
relationship between money supply and the
price level. Thus,

MV=PQ (1)
Where: M=money stock
V = income velocity of money
P = price level
Q = Quantity/ Output
 Is the total paper bills, coins and cheques in
circulation, and near monies
 Refers to the number of times a given stock
of money is circulated to support the annual
flow of goods and services.
 P= M(V/Q) (2)

The equation shows that money stock and the

price level are directly proportional.

Thus, an unwarranted increase in money stock

leads to inflation.
MONEY PRICES
SUPPLY
RESULTS:
• INFLATION
• DECREASE MONETARY VALUE
PRICES

MONEY
SUPPLY
 Demand-pull inflation

It is the rise in prices as result of the increase in total
demand for goods and services in the economy.
 Possible when the economy is already at full-employment.
 Cost-push inflation

Increase in prices due to the unprecedented increase in the
cost of production arising from internal and external
supply shocks.
 Structural inflation
 This is the inflation that is built-in the economic system
because of the government’s monetary policy.
 Yes. When we lower demand prices will
soon drop
 NO. When we lower demand with cost
push inflation it will take longer before
prices decline
 Effect on savers: nominal money loses its
value, thus, savings will be reduced and
savers will lose if the nominal interest rates
are lower than the rate of price inflation.
 Effects on debtors and creditors: creditors
lose because the real rate of interest on the
amount loaned is reduced. On the other
hand, borrowers will gain because the real
value of interest payment on the borrowed
amount declines.
 On fixed-income earners: The real value of
fixed nominal money income declines. Thus,
purchasing power of a given fixed income is
smaller leading to a reduction in living
standards.
 Country’s competitiveness in the world
market: High domestic inflation makes
domestic goods more expensive in the
international market, and thus reduces the
country’s competitiveness in the world.
 On income: Inflation serves as tax on
peoples’ income because it means the losses
that money holders suffer due to the
lowering of the real value of money.
 For rich people: they resort on investing non-
productive activities such as antiques.
 Very high and typically accelerating inflation.

 Example: Hyperinflation in VENEZUELA

 real estate
 art
 gold
 It is the amount you are charged for
borrowing money – a percentage of the total
amount of the loan.

 The interest rate acts as a price for holding or

loaning money.

 Banks pay an interest rate on savings in order

to attract depositors.
 Find the expected real interest rate if the
Nominal Interest Rate in this year 2019 is
7.5%. The potential output level for 2020 is at
10 (in millions). The price level of goods in is
at PHP 100.00 and 103.00 in 2018 and 2019,
respectively. On the other hand, the level of
output produced in 2017 and 2018 is at 6.5
and 10.5 (worth in millions), respectively.
 Lenders have to be rewarded in real terms
Also, the Federal Reserve may raise interest
rates
 Cut government spending
 Raise taxes to pay debt
 Relax trade restrictions
 Increase productivity
 Is an economic theory that states that
changes in the money supply only affect
nominal variables and not real variables.

 An increase or decrease in the money supply

can change the price level but not the output
or structure of the economy.
 A classical economic concept that states
general price levels may be influenced by
monetary forces yet there is not real affect on
activity.
 In this view, the primary function of money is
to act as a lubricant for the efficient
production and exchange of commodities.
 Banks perform many functions and offer
many services to consumers
 1) Store money- its safe and convenient
 2) Credit Cards- cards entitling their holders
to buy goods and services based on the card
holders promise to pay
 3) Saving money- the most common options
are:
 Savings accounts
 Checking accounts
 Money Market Accounts
 Certificates of Deposits (CDs)
 4) Loans- Make loans to help new businesses
and help established businesses' grow
 5) Mortgages- a specific loan used to
purchase real estate
 Banks make money of interest rates they
receive from consumers who have taken
loans
 Interest is the price paid on the use of
borrowed money
 The rise of computers in banking as increased
dramatically
 Automated Teller Machines (ATM)- can
deposit, withdraw cash and obtain account
information
 Debit Cards- used to withdraw money from
checking account
 Automatic Clearing Houses (ACH)- transfer
funds from customers’ accounts into
creditors’ accounts
 Home Banking- can check balances or make
transfers from home computer
 Store Value Cards- have magnetic strips or
computer chips with account balance
information