DEMAND FOR MONEY

Refers to holding on with your money.

is how much of your wealth you wish to hold as money at any moment in time. It is thus
a stock demand. Your wealth is a stock, and you must decide how to allocate that stock
of wealth between different kinds of assets -- for example a house, income-earning
securities, a checking account, and cash.

TYPES OF DEMAND

Transactions motive. Money is a medium of exchange, and people hold

money to buy stuff. So as income rises, people have more transactions and
people will hold more money

Precautionary motive. People hold money for emergencies (cash for a tow
truck, savings for unexpected job loss). Since this also depends on the
amount of transactions people expect to make, money demand is again
expected to rise with income.

Speculative motive. Money is also a way for people to store wealth. Keynes
assumed that people stored wealth with either money or bonds. When
interest rates are high, rate would then be expected to fall and bond prices
would be expected to rise. So bonds are more attractive than money when
interest rates are high. When interest rates are low, they then would be
expected to rise in the future and thus bond prices would be expected to fall.
So money is more attractive than bonds when interest rates are low. So under
the speculative motive, money demand is negatively related to the interest
rate.

MONETARY POLICY INSTRUMENT

Measures or actions by the Central Bank to regulate the supply of money in the
economy constitute what is called the monetary policy. Monetary policy actions of the
BSP are aimed at influencing the timing, cost and availability of money and credit , as
well as other financial factors, for the purpose of influencing the price level. this is in line
with the primary mandate of the BSP under RA 7653 otherwise known as the New
Central Bank Act to maintain price stability conducive to a balanced and sustainable
growth of the economy.

In the Philippines, monetary policy instruments are classified into

1. Open Market Operations
It involves the buying or selling of government securities from banks and financial
institutions of the BSP in order to expand or contract the supply of money. an open
market purchase of securities by the BSP results in an increase in reserves and an
increase in the supply of money. Moreover, an open market sale of securities by the BSP
results in a decrease in reserves and a decrease in the supply of money.
2. Rediscounting
This refers to transactions whereby the BSP extends credit to a bank collateralized by its
loan papers with customers. This instrument plays a dual role; as a tool to allocate credit
to preferred sectors of the economy and as an instrument to influence the supply of
money and credit. Rediscounting rate is the interest rate charged by the BSP to the
banks that borrow from them.
3. Reserve Requirements
This is the minimum amount of reserves that banks must hold against deposits.
e.g. let's say MR. Rafael deposits P100, 000.00 with Land Bank of the Philippines. The
BSP requires LBP to keep 10% of deposits.
4. Direct Controls
These consist of quantitative and qualitative limits on the ability of banks to undertake certain
activities. The most common types of direct controls include limitations on aggregate bank
lending, selective limitations on certain types of back lending and interest rate regulations. these
controls are prescribed to promote specific sectors and focus more on developmental financing .
Under the new charter, the Spas abandoned direct controls with its pursuit of more market
oriented and deregulated policies.
5. Moral Suasion
The BSP persuades banks to make their lending policies responsive to the needs of the
economy. Banks must tighten their credit programs in times of inflation and loosen them in times
of recession.