The Government and Economy*Monetary and Fiscal

Policy*

Monetary

Policy

Monetary Standards• It is synonymous with the

standard money of a country.

Monetary System• Gold- Gold Standard

• Silver- Silver Standard

• Inconvertible paper or managed currency- Inconvertible paper or managed currency standard.

MONEY SUPPLY•FORMS- cash, checks, and other liquid financial instruments.

1.Currency Circulation(paper money and coins)

2.Demand deposit or checking account (checks)

3.Savings and time deposits4.Large negotiable certificates of deposits.

Monetary Theory

•The theory of the value of money.

Value of Money- Purchasing PowerPurchasing Power- No. of goods and services it can buy

Quantity Theory of Money

MV= PQ

M is the quantity of money/ money supplyQ is the no. of goods and servicesP is the average price level of goods and servicesV is the income velocity of money/ the no. of times money is spent in one year

Therefore:•If money supply (M) increases with velocity being stable, total spending on goods and services will increase (PQ).

Money•Is the key determinant of aggregate demand or total demand.

Credit•Is a vital tool of economic development for both individuals and countries.

•Not only favorable to the borrowers but it also benefits other individuals—whole economy and society.

•Social impact

Advantages

of Credit Economy

1. Allows business firms to acquire cash loans by using their machines or buildings as security, instead of selling a part of their physical properties to obtain money. They can also sell bonds to generate more funds for their investment ventures.

2. Dynamic and enterprising men have the opportunity to put up their enterprises through credit.

3. Government projects or programs can be funded through bonds or loans.

4. Credit accelerates production, employment, income and consumption.

5. Permits low-income consumers to enjoy the consumption of goods and services sooner, like house and lot, appliances, and other consumer products.

Disadvantages of a Credit Economy

1. Heavy borrowing by the government may likely lead into inflation. It requires competent and dedicated monetary authorities, and the cooperation of top government official to use properly local and foreign loans.

2. Borrowing by the government may result to extravagance and inefficiency. This has been noted by development economists on the credit performance of the developing countries.

3. Business errors in the use of credit funds have unfavorable chain effects on the whole economy. Failure of some firms to settle their debts with other companies affect the latter to pay their bank loans. In turn, the banks cannot pay their depositors.

4. Excessive loans from other countries by the government may likely be a burden to future generation, unless such loans are wisely invested in the economy for the benefits of the masses.

5. In some cases, credit reduces future consumption of debtors.

The Social Philosophy of Credit

•Credit does not exempt even the rich.

•Obviously, the rich become richer.

•The investment of the rich would have been more significant if their benefits reach the poorest of the poor.

•Credits should not only be used to benefit the users but also society and economy. – Guiding Principle in grating loans to applicants

Objective of the Credit System of the

Government•Improve the social and economic conditions of the poor, especially the rural areas and urban slums where conditions are more miserable.

•The chains of economic slavery should be broken.

•The poor need money for putting up income- producing projects or business

Powers of Monetary Board

1. Issue rules and regulations for the effective discharge of the responsibilities and exercise of the powers vested upon the Monetary Board and the Bangko Sentral;

2. Direct the management, operations, and administration of the Bangko Sentral, reorganize its personnel, and issue such rules and regulations for this purpose;

3. Establish a human resource management system which shall govern the selection, hiring, appointment, transfer, promotion or dismissal of all personnel. Such system shall aim to establish professionalism and excellence at all levels of the Bangko Sentral in accordance with the sound management principles; and

4. Adopt an annual budget for the effective administration and operations of the Bangko Sentral in accordance with applicable laws and regulations.

Monetary Policies

•Monetary Policy is a major economic policy.

Monetary Policy According to Professor James Boughton•The process whereby the monetary authority attempts to achieve a desired set of goals controlling either the money supply, the cost and availability of credit, or the allocation of credit to its various uses.

In short,It is a rule about the distribution and use of money for a purpose of realizing a desirable economic goal or set of goals.

Rules in Achieving Monetary Goals in Bangko Sentral

•Monetary stability•Balanced and sustainable economic growth

Limitation of Monetary Policies•Not effective during depression.•Delay involved in analyzing the monetary and financial problems.•The impact of such monetary policies.

Easy and Tight Money-He still receives exactly

as much take-home pay;-He still finds on the dinner table exactly the same kind of food he relished the past several seasons; and

-He still can purchase exactly the same amount of goods on credits at his neighborhood sari-sari store.

Central Bank- Regulates money supply and causes an upward or downward change in the amount of credit that investors and producers can lay their hands on.

-adopts a tight-money policy.-adopts an easy-money policy when the prices of various commodities are relatively stable.

- Can do little to stimulate dollar receipts and use them to increase money supply.

Indicators when the imperatives of economic growth are very clear:When prices of various commodities are relatively stable,

When manpower is idling in the streets and machines are rusty with disguise, and

When our dollar reserves are high, or at least sufficient to protect us against most contingencies

Number of things that are likely to happen:With a high rate of importations, our dollar reserves are trimmed down to a dangerously low level;

With more money incomes in consumers’ hands, they would scramble about for more goods and services- causing prices to increase; and

With employment full or near-full and with prices high and prosperity evident, our workers would demand higher wages without necessarily increasing productivity- causing further increase in costs and prices.

What high prices tell us?First indicator is the price level-When money has been too easy, too long, machines are overworked.

-Work schedules are stretched beyond the maximum efficiency point.

-Machines break down more often.

-Overtime pay has to be paid.-Productivity of workers on overtime goes down.

-Per unit cost of production increases.

-Industrial prices tend to be pushed up.

-More purchasing power means increased demand for food.

-Agricultural prices tend to be pushed up.

-More income also mean added demand for nonfood items.

Danger SignalSecond danger signal is the international reserve level.

FiscalPolicy

FISCAL POLICY- Refers to the

revenue and expenditure measures of the public budget.

Instruments/Tools of Fiscal Policy

•Taxation•Government Expenditures

The objectives of fiscal policy:•Provision for social goods;•Equitable distribution of wealth and income;•Maintain high employment;•Ensure price stability; and•Sustain a satisfactory rate of economic growth.

Fiscal Functions

•“fiscal” Latin word fiscus which means money bag.- It pertains to public treasury or revenues,

Three Major Fiscal Functions•Allocation Function•Distribution Function•Stabilization Function

Shortcomings of Fiscal Policies

•Very effective during economic depression.•Poor managing and implementation of projects.•Suffers from several lags.

Fiscal Policy and the Masses

Positive and Negative Effects-Taxation can encourage or discourage investment, employment, production, consumption and savings.

-Government expenditure in less developed countries should be socially-oriented.