Fiscal & Monetary Policy

• Money


  Anything that the market accepts as payment for goods and services
• Evolution of money

  1. Barter system

  2. Lydians (Fertile Crescent) - first to use metal coins as medium of exchange

  3. Banking system (banca - Italian for bench)

  4. Use of bills to settle transaction started

  5. Age of Mercantilism - used gold and silver bullions
• Functions of Money

  • Medium of Exchange (used in market transactions)
  • Standard of Value (used as a measure of market values)
  • Store of Value (a wealth and can be stored)
  • Standard of Deferred payments (economic transactions can be done on credit basis)
• Components of Money (Narrow Money)

  • Money in circulation - cash (coins and paper bills)
  • Demand deposits - savings and checking accounts in banks
  • Time deposits - interest-bearing bank account with date of maturity
• Factors affecting the Demand of Money

  • Income - directly proportional to consumption
  • Interest Rates - high interest rates on loans discourage people to borrow money (remember savings and investment)
  • Inflation Rates
• Why people Want Money (Keynes)

  • Transactional Motive - people's desire to buy goods and services to satisfy economic wants and needs
  • Precautionary Motive - desire to meet emergency needs
  • Speculative Motive - keep money as safe assets
• Monetary Policy


  Credit control measures adopted by the central bank of a country to control the supply of money, aiming to promote price stability and full employment
• Bangko Sentral ng Pilipinas


  The central bank of the Philippines, with the primary objective of promoting a low and stable inflation conducive to a balanced and sustainable economic growth
• Types of Monetary Policy

  • Contractionary Monetary Policy - aims to control inflation by reducing the level of money supply
  • Expansionary Monetary Policy - aims to improve liquidity in the market by increasing the level of money supply
• Monetary Policy Instruments


  • Discount Rate - interest rate BSP charges commercial banks for short term loans
  • Reserve Requirement - portion on deposits that banks must hold in cash
  • Open Market Operations - Raising or lowering the overnight RRP rate, Issuance of BSP securities, Outright sale or purchase of government securities
• Discount Rate


  Interest rate BSP charges commercial banks for short term loans
• Three Pillars of Central Banking

  • Price Stability - BSP's primary mandate, low and stable inflation, preserves purchasing power
• Fiscal Policy


  The set of policies of the government on TAXES and GOVERNMENT SPENDING and BORROWING to achieve economic growth
• Why the Government Intervenes in the Economy

  • To DELIVER PUBLIC GOODS and SERVICES
  • To ADDRESS NEGATIVE EXTERNALITIES (ex: water pollution, flooding, etc.)
  • To REGULATE operations of industries to ensure fair competition and promote the interest and welfare of the consumers
  • To CHART economic and national development plan
  • To COMPLEMENT the efforts of BSP in promoting price stability and economic growth
• Sources of Government Funds

  • Taxes - Collected by Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC)
  • Non-tax revenues - income of the Bureau of Treasury, government fees and charges, privatization, foreign grants and loans
• Classification of Taxes


  • Direct Taxes (shouldered and payed by the taxpayers) - Personal Income Tax, Business Income Tax, Property Tax, Estate Tax and Gift Tax
  • Indirect Taxes (passed on to other persons) - Value Added Tax, Excise Tax, Duties
• Purposes of Fiscal Policy

  • Achieve and maintain full employment
  • Reach a high rate of economic growth
  • Keep prices and wages stable
  • Curtail inflation
  • Increase Aggregate Demand
• GDP


  = aggregate demand
• Types of Fiscal Policy

  • Contractionary Fiscal Policy - regulates taxes and government spending to decrease Aggregate Demand
  • Expansionary Fiscal Policy - regulates taxes and government spending to increase Aggregate Demand