SOC SCI 5

• Money supply


  A measure of the aggregate amount of money in the economy over a particular period
• Items used as money in the past


  • Pebbles
  • Shells
  • Furs
  • Whale's teeth
  • Pieces of paper
  • Gold
• M1 (narrow money)


  Includes currency in circulation (currency outside ODCs) & peso deposits subject to check of the monetary system
• M2


  Includes M1 and other deposits included in broad money like savings and deposits
• M3 (money liquidity)


  Consists of M2 & securities other than shares included in broad money
• M4


  Includes M3 and foreign currency that are transferrable and are in other deposits
• Money creation


  1. Government injects money in the economy as it buys assets or goods from the private sector

  2. Government takes-out money circulating in the economy through the imposition of taxes and when it sells its assets to private individuals and institutions
• Open market operation (OMO)


  Actions by the BSP to increase or decrease the money circulating in the economy by buying or selling bonds
• Money multiplier


  Calculates the outcome of a change in a bank's reserve requirement to the overall supply of money in an economy
• If a commercial bank receives a currency deposit, cash is taken out of circulation. Thus, there will be a decrease of money supply
• Money supply is the total value of money in an economy over a period
• Banks can create money through loans. Their ability to create money is dependent on the quantity of its excess reserves
• Individuals and institutions can only borrow money equal to the bank's excess reserve
• BSP can increase the money circulating in the economy by buying bonds from private institutions
• BSP can also remove money circulating in the economy by selling bonds