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We are
Bonjour !
group 2

Tri Setya
Cahyani P.

What will we discuss ?

Money and the Economy

Monetary Policy
Institution of Monetary
The Value of Money

the Economy
Money and the Economy

In an economy with
money, more or less
the amount of
money in circulation
determines whether
current economic
The money
activity supply is the
liquidity in the
Inflation Money and economy.
the Economy

The quantity theory
The relationship between the money supply to economic activity has long been
recognized by the quantity theory as follows:
MV = Y
Where :
M = amount of money in circulation
V = the number of times the currency changed hands from one to another in a year
Y = national income

The amount of money circulating in the community consists of currency and demand
deposits and known as M1. In the modern economic system, quasi money is often
called money close growing rapidly. This quasi money in the form of savings, deposits,
credit cards and ATMs. At this time the money supply known as M2, which is M1 plus
OF Review of quasi money, As in quasi money which
CIRCULATI which consists of savings, has V = 1, as well as the
deposits, ATM, credit card. situation on demand
ON (V) deposits.

Demand deposits likewise
In this case the money
used in the process of
converted into the currency
purchasing by using a
so that is having a quarterly check or giro.
cash transfer arm (V = 1).
Similarly, in the use of ATM Currency comprises of
and credit cards, quasi coins (denomination
money can used directly hundred, five hundred and
without converting it into one thousand) and
currency first.. banknotes. Typically, this
type of currency is
considered to have the
same rotation speed
Money Circulation Factors
The factors that affect the amount of money in
circulation is:

1. Policy Central Bank in the form of

autonomous rights and monetary policy
2. Government policy through the finance
Factors minister to increase the circulation of money
3. Commercial banks can create demand
Bank of Indonesia can know do deposits through the purchase of shares and
report that the factors that securities.
influence the supply of money from 4. The level of public revenue
both foreign and domestic. The 5. The interest rate on bank
increase in foreign assets held by 6. The tastes of consumers towards a product
Bank Indonesia will increase the (the higher the consumer appetite for goods
money supply, whereas the then the price of the item will be pushed up,
reduction in foreign assets held by so that would push the amount of money
Bank Indonesia will reduce the circulating more and more, and vice versa)
money supply. 7. Prices of goods
8. The credit policy of the government

Monetary policies

Monetary policy is any policy taken by the government or by Bank

Indonesia or together in the field of finance or monetary fields in the hope
of influencing the real sector, in particular to support economic
Bank Indonesia has a goal to achieve and maintain rupiah
stability. This objective as stated in Law No. 3 2004 article 7 of
Bank Indonesia.

It is the stability of the rupiah, among others, is the stability of

prices of goods and services reflected in inflation.

Operationally, the control of monetary targets, the use of

instruments, such as open market operations in the money
market, both rupiah and foreign currency, the determination of the
discount rate, the determination of minimum mandatory reserves,
and credit or financing arrangements.
Bank Indonesia can also do the ways of monetary policy based on
Tools of Monetary
12 Policy

open market operations in
the money market (rupiah)
and foreign currency

determination of minimum
mandatory reserves

determination of discount

credit or financing

open market operation

Selling SECURITIES Buying
liquidity) liquidity)
Minimum Reserves Ratio/ Giro Wajib

minimum amount of money that must be

maintained by the bank in the form of
current account balances at the Bank
Indonesia as stipulated by Bank Indonesia.

Political Discount /
Politik Diskonto
Bank Indonesia is also
implementing monetary
policy framework through
the control of interest
rates (interest rate
target). Interest rate,
known as the BI rate,
determined by the Board
of Governors of Bank
Indonesia every month.

Credit or financing arrangements

The purpose of the credit Credit management -

arrangement is for must be set properly so
precaution (Prudent that the monetary
banking), to avoid system can run well
misuse of credit with the and aim to stabilize
ultimate goal of value for money can be
minimizing bad debts. achieved.

Another Policy

Moral Persuasion Sanering Money Devaluation

is monetary policy to is a policy endorsed by the Is the declining
regulate the money government of the old order is to replace the old value of
supply by giving a advice as an effort cutting the money with new the currency in the
to the economic agents. value of money without money by country against
Examples such as reducing the value of the comparison with the foreign currencies.
banking urged lenders to price, thus causing a value of old money If that happens,
be cautious in issuing decrease in purchasing Rp1000 replaced by usually the
credit to reduce the power. a new currency with government
amount of money in This policy was a nominal rupiah. intervene so that
circulation conducted with the aim the value of the
to tackle inflation and domestic currency
reduce the circulation remained stable..
of money as a result of
price spikes that
occurred in Indonesia.
Nature of the Monetary
Policy and The Results
In conclusion, the financial
see the
banking andside,
the realofthethe
sector was
monetary ininstrumental
quite lending
determining the effectiveness of
rates response
is also notto interest
rate cuts in
a longer
monetary policy
the BI rate by
process. The conclusion is that
the than
monetary thethat
policy Also,isfromif
the public
powerful are
may policy.
be the
less or notThe
effective, while a strong
conditionfor the toeconomy
improve in
monetary policy of the
often is a
the badfor
disaster decline
theand in lending
rates andmonetary
Therefore, credit demand
policy must is
be moderate sector
and inresponded
with veryconditions.
by raising lending. influential
in the monetary

Institution of
1960 1965
The banking sector or the formal financial
sector in Indonesia in the first years in the
Soekarno government consists of:

- A central bank (which also operates as a

general bank)
- 5 commercial banks
- A state-owned development bank
- 100 domestic private banks
- 4 foreign banks
Banking orientation at that time focused on the
financing and international trade continuity. Because
Indonesia fell into hyperinflation, existing financial
institutions experienced a period of low tide. By
1965, commercial banks could no longer perform its
functions normally: inflation has undermined the
ability of commercial banks to withdraw funds from
the public, and as a result, banking activities in the
field of lending became meaningless. In the end, all
foreign banks were closed.
1965 1967

new order government seemed to reduce the role of

the state in economic life, to rely more on market
forces and give an opportunity to the private sector
to take a greater role in the economy.

the general banks were growing rapidly, so that Bank

Indonesia which used to have a dual role (as the
commercial banks and the central bank), stopped its
role as a commercial bank and operated only on the
central bank. The changes were officially included in
the central bank law in 1968. After 1968, many
private banks didn't do its function as a bank, but
only as a means to expedited financial private
since the beginning of 1970s, these banks emerge
as banks in the real sense, and receive deposits
from the companies who acted as their customers
and also give credit to them.

After 1972, foreign banks have opened

representative offices of foreign banks and also
exerts a positive influence on the development of
the financial sector in Indonesia. This foreign
institutional development has facilitated the flow of
huge amounts of capital into the country.
Because of the excessive capital inflows from abroad, and
unavailibilty of domestic banking system to absorb the
excess funds, then in 1983 the government issued the
deregulation of banking for the first time, known as
Package June (Pakjun) 1983. These packages provide
convenience to the bank to determine their own deposit
rates, and eliminated Bank Indonesia intervention in the
banks in lending. In this package also introduced Bank
Indonesia Certificates (SBI) and Money Market Securities
On October 27, 1988, the government established Package
October 27, 1988, known as Pakto 88. This package was
the most liberal rules in the history of Indonesian banks.
Only with a capital of 10 billion, anyone can establish a new
bank. And the new foreign banks were permitted to open
branches - new branches in six cities.
In 1992, the number of banks were 17.000 banks,
including 8.400 BPR (Bank Perkreditan Rakyat). A large
number of banks make labor, mobilization of deposits,
and savings were becoming increasingly competitive.

Then, in March 1992, the government issued Banking

Law No. 7 that set various requirements for establishing
new banks, such as organizational structure, capital,
ownership, expertise in banking and employability. And
in that year also, the government raised the minimum
capital to 50 billion for bank establishment.
Although the capital and other requirements in the
tightened bank, new bank continued growth through 1994.
Many banks controlled by the conglomerates, which turned
out to enrich their own business practices. Finally, many
banks experienced liquidity problems and the
conglomerates bank owners fell into politics to strengthen
the status quo gap control of economic resources that led
to the scandal of Bank Indonesia Liquidity (LBI), where
many of the liquidity aid were misused.

This banking problems eventually led to the government's

announcement on 1 November 1997 to liquidated particular
banks. The banking crisis that occurred in Indonesia is the
most severe in comparison with other countries (Malaysia,
South Korea, and Thailand).

The Value of
Inside the state, the value of the rupiah currency is
determined by its purchasing power, the ability of money
to acquire goods or services. For example, if the amount
of goods and services that can be exchanged for one
unit of currency rupiah (say $ 10,000.00) is as much of x
units, and in the next year it get y units, and if x <y,
then it is said that rupiah rose. Conversely, if x> y, then
said the rupiah is declining. In everyday circumstances,
the rupiah value that declined to goods and services,
generally said that the price of goods and services have
increased. Such circumstances is called inflation. The
opposite situation is called deflation. But in this case, we
will only discuss inflation because inflation is more likely
to occur.
Simply, inflation is defined as rising prices in general and
continuously. Indicator that is often used to measure the rate of
inflation is the Consumer Price Index (CPI). Other inflation indicators
based on international best practice among other things are:
- Wholesale Price Index
Wholesale price of a commodity is the price of the transactions that
occur between the seller / trader with the next first major buyers /
traders in large amounts in the first market of certain commodities.
- the Gross Domestic Product deflator (GDP)
GDP describe the measurement of final goods price level (final goods)
and services produced in a country. GDP deflator is generated by
dividing the GDP at current market prices to GDP at constant prices
for the year in question. Deflator index is also known as the implicit
price index.
Say in America, the value of the US dollar rose against the rupiah as follows:

US $ 1 = US $ 9500 to US $ 1 = Rp 9600
Incidentally, in Jakarta, written in the same manner as above. Let's say that
the foreign exchange market in Jakarta also showed the same price as above.
To simplify the figure, say a unit of Indonesian rupiah is Rp 10,000. Then, in
Jakarta, it should be recorded as :
From $ 1 unit = US $ 1.0526 to Rp 1 unit = US $ 1.0417
Notes of foreign exchange rates indicate that the value of the rupiah which was
originally able to get US $ 1.0526 down to only get US $ 1.0417 for each unit.
It showed that the US dollar has appreciated (rate
increases) and the Indonesian rupiah depreciates
(impaired). Rise and fall of the value of a foreign
currency relative to other currencies are determined by
the forces of demand and supply is referred to as the
appreciation (if it rises) and depreciation (if it dropped).
By contrast, if the change in value of a currency against
foreign currencies is because because of government
policy, which is said to devaluation (if down) and
revaluation (if it rises). However, we will only discuss
about a devaluation in this case, because devaluation
are more likely to happen recently.
There are two ways to determine foreign exchange rates, namely:
Mint Parity
Each currency has collateral in central bank, which is in the form of gold
and other precious metals coupled with securities and convertible
foreign currency (which is easily exchanged for money). All warranties
contained in a currency is synonymous with noble metal content (mint)
on the money. The content of the guarantee on the currency indicate
their respective values, and when both are compared it will obtain the
value of a particular currency relative to other currencies.
Purchasing Power Parity
It is obtained by comparing the purchasing power of the currency in
each country, which is indicated by the consumer price index. So,
comparing the two country's consumer price index (with the same base
year) will acquire the currency exchange rate of the country relative to
other currencies.