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FINALS | MONEY AND BBANKING

II.
EXAM 1 Liquidity Preference Framework/Model
A model developed by John Maynard Keynes that predicts the
I. equilibrium on the basis of the supply of and demand for money.
Price Level
The classicists argue that money supply affects the price level. Required Reserves/Reserve Requirement
The fraction of deposits that the BSP requires is kept as reserves.
Output is unrelated to price level
In the classical model, the aggregate supply curve is vertical line Liquidity
because it assumed that output is unrelated to price level. The relative ease and speed with which ab asset can be converted
into cash.
Classical Economists
The origins of modern monetarism lie in the work of the classical Quantity Theory of Money
economists. The theory that nominal income is determined solely by movements
in the quantity of money.
Milton Friedman
Economist who said that inflation is always and everywhere a M1
monetary phenomenon. The most narrowly defined money, equal to currency in the hands of
the public and the checkable deposits of commercial banks and thrift
Store of Value institutions.
The speculative demand for money emphasizes the function of
money as a store of value. Store of Value
An asset set aside for future use, one of the three functions of
Money is less risky money.
According to Keynes, the key difference between money and bonds
is that money is less risky. Savings Deposit
A deposit that is interest-bearing and that the depositor can
Lower the price of bonds normally withdraw at anytime.
For a given demand for money, a decrease in the money supply will
lower the price of bonds Open Market Operation
Buying and selling of securities by the central bank.
P8 Million
A commercial bank with total liabilities of P100 million and demand Check Deposit
deposits of P80 million must, in order to meet a 10% reserve Any deposit in an commercial bank of thrift institutions against
requirement, hold reserves of at least P8 million. which a check may be written.

P10 Million James Tobin


Assume that reserves equal P50 million and demand deposits equal An economist whose idea on money demand does not only rely on
P200 million. If reserve requirement are 20%, excess reserves equal the expected return of an asset but on the riskiness of the returns
to P10 million. from each asset.

200 Risk
If velocity and output are fixed at 5 and 100, respectively, and the The degree of uncertainly associated with the return on an asset.
price level is at 10, then money supply must be 200.
Transaction Cost
Medium of Exchange The time and money spent trying to exchange financial assets, goods
The transaction demand for money emphasizes the function of or services.
money as a medium of exchange.
Asset
Lower the price of bonds A financial claim or piece of property that is a store of value.
For a given demand for money, a decrease in the money supply will
lower the price of bonds.

A risk-averse individual will: M3


Always hold a diversified portfolio of securities A measure of money that adds to M2 and deposit substitutes.
Never gamble
Prefer riskless security which is certain to pay 5% over a risky Money Multiplier
security having an expected return of 5% A ratio that relates the change in the supply of money to a given
change in the monetary base.
Expansionary Fiscal Policy raises equilibrium output aand interest
rate.
III.
The money multiplier and the money supply are negatively related Under the classical model, monetary policy is effective that the
to the required reserve ratio. fiscal policy in influencing the economy.

The liquidity preference framework concludes that when income is Increase in government spending leads to higher output and interest
rising during a business cycle expansion (holding other economic rates.
variables constant) interest rates will rise.
Increase in money supply leads to higher output and lower interest
The money multiplier and the money supply are negatively related rates.
to the excess reserve ratio.
Holding everything constant, an increase in wealth raises the
quantity demanded for an asset. (Bonds)
EXAM 2
The quantity demanded of an asset is positively related to its
expected return relative to alternative assets. (Bonds)
I.
IS Curve Higher government deficits increase the supply of bonds, whereas
Shows combination of interest rates and the levels of output such government surpluses decreases the supply of bonds.
that planned spending equals income.
Increased liquidity of bonds results to an increase in the demand for
Tight Monetary Policy bonds, holding everything else constant.
Monetary policy characterized by a decrease in money supply that
results to a higher interest rate. LM Curve must slope upward to the right because, other things
equal, a higher level of means a greater demand for money and
LM Curve there must accordingly be a higher rate to produce an offsetting
Shows all combinations of interest rates and levels of income such lower demand for demand for money.
that the demand for real balances is equal to the supply.

Partial Crowding Out EXAM 3


It occurs when expansionary fiscal policy causes interest rates to
rise, thereby reducing private spending, particularly investment.
I.
Monetary Policy Monetary targeting has been largely abandoned because:
A policy on the regulation of the supply of money in the circulation. The relationship between the monetary aggregates and overall
economic activity is weak.
Fiscal Policy
The policy of the government with regard to the level of government Advantages of the inflation targeting:
purchases, the level of transfers and the tax structures. Simplicity and clarity of target
Increase accountability of the central bank
Reduce effects of inflationary shocks
II.
The higher the interest rate, the more costly it is to hold money and Inflation is a monetary phenomenon
accordingly, the less cash it will held at each level of income. Monetarists and Keynesians both agree with what Milton Friedman
said that inflation is a monetary phenomenon.
The IS curve is negatively sloped because an increase in the interest
rate reduces planned investment spending and therefore, decreases If the Central Bank chooses a money supply intermediate target, and
aggregate demand, thus reducing the level of income. if the demand for money increases,
then: Interest rates will increases
The steeper the IS curve, the less sensitive investment spending.
The greater the responsiveness of the demand for money to the The origins of modern monetarism lie in the work of the Classical
interest rates, the flatter the LM curve. Economists

The less interest-sensitive money demand is, the more effective A one-shot increase in government expenditure causes
monetary policy is relative to fiscal policy. a one-shot increase in the price level

A increase in the money supply raises equilibrium output but lowers Something inflation targeting does for policymakers is to:
the equilibrium interest rate. Increase their credibility
Increase their accountability
Communicate their objectives clearly and openly
Secondary Market
Banks are reluctant to make loans A financial market in which securities that has been previously
The In the News article titled Uneasy Banks May Tighten Loans, issued can be sold.
Stunt Recovery indicates that BSP policy may be ineffective when
Banks are reluctant to make loans. Adverse Election
The problem created by asymmetric information before a
Maintain the interest rate target, but at the lower quantity of the transaction occurs.
money supply
If the Central Bank targets the interest rate, and the money demand Phil Pass
curve shifts to the left, then the Central Bank can maintain the A real-time gross settlement system where settlement is done thru
interest rate target, but at the lower quantity of the money supply. the member-banks demand deposit accounts maintained with the
BSP.
For monetary targeting to be successful in achieving its goals;
monetary authorities should be transparent with their actions. Money Manager
The function of the BSP where they formulate and implement
monetary policy aimed at influencing money supply.
II.
John Maynard Keynes
An economist who views the self-correcting mechanism through III.
wage and price adjustment to be very slow, and hence, sees the 1.) Three pillars of Bangko Sentral ng Pilipinas
need for the government to pursue active, discretionary policy to - Price Stability
eliminate high unemployment whenever it develops. - Financial Stability
- Efficient payments and settlements system
Constant Growth Rate 2.) Functions of the Bangko Sentral ng Pilipinas
A policy rule advocated by monetarists, whereby the Central Bank - The BSP is tasked with promoting price stability
keeps the money supply growing at a constant rate. - The BSP is the supervisor of all banks
- The BSP is the only agency that can issue Philippine
Inflation Targeting banknotes and coins
Monetary policy framework used by the BSP that involves the - The BSP determines the countrys exchange rate.
announcement of an explicit inflation target the BSP promises to 3.) Key services provided by the financial system
achieve over a given period of time. - Risk
- Information
Milton Friedman
- Liquidity
An economist who said that inflation is always and everywhere a
monetary phenomenon

Supervisor of Banks
The function of the BSP where they monitor and examine the
operations of banks, as well as their compliance with banking rules
and regulations.

Bank of Banks
The function of the BSP where they grant loans to banks for
commercial, production and similar purposes such as exports and
agricultural activities.

Universal Bank
A bank which performs the investment house functions in addition
to its banking operation.

Insurance Company
It is designed to render services to persons and companies that
require protection from risks related to life and commerce.

Moral Hazard
The risk that one party to a transaction will engage in behavior that
is undesirable from the other partys point of view.