1. CHAPTER 4: ECONOMIC STRATEGIES/ POLICIES

2. KEYPOINTS FOR NEXT MEETING:
1) 3 FORMS OF DEMAND FOR MONEY
TRANSACTION
PRECAUTIONARY
SPECULATIVE
2) FISCAL POLICIES
TIGHT
LOOSE
3) SUPPLY & DEMAND OF MONEY
CURRENCY IN CIRCULATION
DEMAND DEPOSITS
4) BSP’S TOOLS OF MONETARY POLICIES
REQUIRED RESERVES
REDISCOUNTING
OPEN MARKET OPERATIONS
SELECTIVE CREDIT CONTROL
MORAL SUASION

3. ASSIGN/ QUIZ: TOOLS OF FOREIGN TRADE POLICY (ORAL EXAM)
1) Administrative or Exchange Control
2) Exchange Rate Regimes
3 Types of Exchange Rates:
FLEXIBLE
FIXED
MULTIPLE
3) Tariffs & subsidies

7. Too much outflows of money in our economy will result to deflation.
Producers compete more sharply on the fewer pesos in the hands of the consumers
Thus, a drop in the price level and a rise in the value of pesos.
Too much inflows of money into our economy usually results to inflation.
Inflation: a decline in the value of money, with an upward movement of the price level.
When the amount of money in circulation increases, people have more money to spend.
There will be an increase in demand.
Therefore, consumers compete for available goods.
They pay more pesos for the goods they want and consequently, an increase in price.
Inflation then can be described as too much pesos going after a small number of goods.

11. MONETARY POLICIES BARTER SYSTEM
Products or services are exchanged for other products or services.
Is practiced provided that the cost of production is:
equal and the participants are willing to trade.

12. MONEY SUPPLY: CURRENCY IN CIRCULATION & DEMAND DEPOSITS
balances in bank accounts that depositors can demand
Three forms:
Transaction in Demand
Precautionary Demand
Speculative Demand

13. SUPPLY & DEMAND OF MONEY: CURRENCY IN CIRCULATION & DEMAND DEPOSITS

14. FORMS: DEMAND FOR MONEY
TRANSACTION DEMAND
PRECAUTIONARY DEMAND
SPECULATIVE DEMAND

15. IMPLEMENTS POLICIES PERTAINING TO MONEY SUPPLY
CREDIT & BANKING SYSTEM

16. Bangko Sentral ng Pilipinas
The BSP uses monetary policies to:
regulate money
through credit and banking system
in order to attain monetary stability conducive to economic development.

17. The rule observed by the BSP in relation to credit and money supply
when the economy is at intense pace: what happens to credit?
it tightens credit
When money has been easy for too long such that investment, production and income are exceeding resource limits, tight credit may have to be applied.
When it is at a dragging pace (when money has been tightened to long):
it loosens credit.

18. BSP'S TOOLS OF MONETARY POLICY
Required Reserves
Rediscounting
Open Market Operations
Selective Credit Control
Moral Suasion

19. LESS MONEY RESERVES = LESS LENDING MORE MONEY RESERVES = MORE LENDING
REQUIRED RESERVES
LESS MONEY RESERVES = LESS LENDING
MORE MONEY RESERVES = MORE LENDING
HAVE TO INCREASE THE RESERVES
HAVE TO DECREASE THE RESERVES
EFFECT: DEFLATION
EFFECT: INFLATION
CAUSE: INFLATION
CAUSE: DEFLATION

21. Required Reserves
When BSP decides that lending behavior should be 80%, the reserves it requires is:
20%.

22. FROM AN INITIAL DEPOSIT OF p100,000 AND A “REQUIRED RESERVE OF 65%”, A COMMERCIAL BANK CAN INITIALLY LEND A MAXIMUM AMOUNT OF?
P 35,000 OR p 65,000

24. LOW INTEREST RATE = BANKS TEND TO BORROW INCREASE IN MONEY SUPPLY
REDISCOUNTING
LOW INTEREST RATE = BANKS TEND TO BORROW
INCREASE IN MONEY SUPPLY
EFFECT: INFLATION

25. Debt security (obligation)
OPEN MARKET OPERATION
BONDS?
Debt security (obligation)
In return for that money, the issuer provides you with a bond in which it promises to pay a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due.
When you purchase a bond, you are lending a money to the government

26. BUYING OF BONDS: INCREASES MONEY IN CIRCULATION
SELLING OF BONDS: REDUCES MONEY IN CIRCULATION

28. SELECTIVE CREDIT CONTROL
Lending activity is either to production or consumption
If priority is production = credit for consumption is lessened
More funds given for production

31. To hold sessions with commercial banks
MORAL SUASION
persuasive ability of the Chairman of the Monetary Board and the Governor of the BSP.
To hold sessions with commercial banks
To make suggestions and policies on national development goals

32. MORAL SUASION
Amando M. Tetangco, Jr. assumed office as Governor of the Bangko Sentral ng Pilipinas in July 2005
Took up AB Economics at the Ateneo de Manila University where he graduated cum laude.
He took up graduate courses in business administration in the same institution.
As a central bank scholar, Mr. Tetangco took up his MA in Public Policy and Administration (concentration in Development Economics) at the University of Wisconsin in Madison, USA.

34. FISCAL POLICY
the government influences the economy through its revenue and spending
TAXES (REVENUE):
Inflows for the government which is referred to as revenue
Bureau of Internal Revenue (BIR) is the agency responsible for tax collection
TARIFFS (REVENUE):
Taxes charged on either imported or exported goods
Collection of tariffs is undertaken by Bureau of Customs

35. Tight or loose Fiscal Policy?
Will consumers still spend?
Corrects inflation or deflation?
More gov’t projects/ services or less?
WILL CONSUMER DEMAND INCREASE OR DECREASE?

36. TIGHT & LOOSE FISCAL POLICY
TIGHT FISCAL POLICY
government levies more taxes and tariffs
correct inflation
less likely the consumer would spend
government also lowers its spending, which then leads to improvement in its budget deficit.
LOOSE FISCAL POLICY
Lowers taxes and tariffs
Resolves recession in business
government increases spending.
Consumers are also encouraged to spend.

37. The government can effect a more efficient allocation of resources through taxation of undesirable activities and by giving tax exemptions and subsidies to those activities, which are crucial to continued development.

38. EFFECTIVE SOLUTION TO INFLATION, SAYS THE LAW?
TAXATION

39. DRAW FUNDS AWAY OR DRAW FUNDS WITHIN THE CIRCULAR FLOW?
IMPORTS
DRAW FUNDS AWAY OR DRAW FUNDS WITHIN THE CIRCULAR FLOW?
INCOME NOT SPENT ON THE CIRCULAR FLOW
PRODUCTION & EMPLOYMENT?
FOREIGN TRADE POLICY

40. INTERNATIONAL TRADING
2 ADVANTAGES & WHY
COMPARATIVE ADVANTAGE
E.G. NURSING
OPPORTUNITY COST IS ERRADICATED (diversion of resources: specialization)
2 DISADVANTAGES & WHY
BRAIN DRAIN
ENVIRONMENTAL (NATURAL RESOURCES)

43. INTERNATIONAL TRADING
As countries develop, specialization:
in production of goods and services happens.
If countries have comparative advantage over other nations in the production of certain goods and services, they engage in:
trade with other countries.
Trading has become a helpful means for countries to acquire things they do not have enough of in exchange of things they have in excess.

44. TOOLS OF FOREIGN TRADE POLICY
1) Administrative or Exchange Control
2) Exchange Rate Regimes
3 Types of Exchange Rates:
FLEXIBLE
FIXED
MULTIPLE
3) Tariffs & subsidies

45. Developing country has a trade deficit
Import > Export

47. TOOLS OF FOREIGN TRADE POLICY
1) ADMINISTRATIVE OR EXCHANGE CONTROL
Government CONTROLS the sales (supply of dollars)
CONTROL PERIOD ( ): Central Bank was the ONLY seller of dollars
TO AVOID DEFICIENCY = RATIONING: to supply dollars to what is considered “PRIORITY” users (COMMON FILIPINOS COULD NOT OBTAIN DOLLARS FROM THE CENTRAL BANK)
Priority is determined = under the table deals
Resulted to Black Market
Individuals will refuse to surrender their dollars to the Central Bank

48. POSITIVE OR NEGATIVE EFFECT?
If $24 billion is needed by the government for social development, quantity demanded for dollars can be reduced to $20 billion by selling it to a much higher price to common users.
CHEAPER DOLLARS = there was an increase demand of Entrepreneurs on imported machineries
POSITIVE OR NEGATIVE EFFECT?
1) EFFECT = NEGLECT OF LABOR INTENSIVE INDUSTRIES
INCREASE IN UNEMPLOYMENT RATE
2) OVERVALUED PESOS = DECREASE IN EXPORTS
EVERY DOLLAR EARNED = SHORTCHANGED ($1 =P2)

49. 1ST TERM:
2ND TERM:
1ST TERM:
1ST TERM:
CONTROL PERIOD:

50. Economy of the Philippines under President Manuel Roxas 1946–1948
Population
1948
19.23 million
Gross Domestic Product
1947
Php 85, 269 million
Growth rate, 1947–48
39.5 %
Per capita income
Php 4,434
Total exports
Php 24, 824 million
Exchange rates
1 US$ = Php Php = US$ 0.50
Sources: Philippine Presidency Project Malaya, Jonathan; Eduardo Malaya. So Help Us God... The Inaugurals of the Presidents of the Philippines. Anvil Publishing, Inc.

51. Gross Domestic Product
Economy of the Philippines under President Carlos Garcia 1957–1961
Population
1957
22.68 million
Gross Domestic Product
Php 189,457 million
1961
Php 224,430 million
Growth rate,
4.54 %
Per capita income
Php 8,353
Php 7,927
Total exports
Php 35,980 million
Php 39,845 million
Exchange rates
1 US US$ = Php Php = US US$ 0.38

54. APPRECIATION OF PESOS: It takes less pesos to buy foreign goods
The peso exchange rate provides us the price of goods and services that we buy from foreigners
It also provides us the price that foreigners pay for the goods and services that we produce and sell to them
APPRECIATION OF PESOS:  It takes less pesos to buy foreign goods
DEPRECIATION OF PESOS:  It takes more pesos to buy foreign goods.
-foreign goods become more expensive
-exports become cheaper to foreigners.

55. price of dollar in terms of pesos
2)Exchange Rate Regimes
price of dollar in terms of pesos
Price = dollar can be sold or bought

56. 2.1.FLEXIBLE EXCHANGE RATE
INCREASE DEMAND IN DOLLARS
DECREASE DEMAND IN DOLLARS
HIGH OR LOW EXCHANGE RATE?
MORE OR LESS PESOS IN THE CIRCULAR FLOW
S > D = EXCHANGE RATE DECREASES
S < D = EXCHANGE RATE INCREASES
TO RESOLVE DEFICIT & SURPLUS OF MONEY
TO RESOLVE DEFICIT & SURPLUS OF MONEY = BUYS & SELLS

57. 2.2. FIXED EXCHANGE RATES
To avoid price fluctuations ( bad for trade and business)
Exchange rate operates only on one price
Central Bank fills in shortages and absorbs surpluses
CB can devalue and revalue pesos.
Devaluation of Pesos (Dollar is expensive; D> S; import<exports)
EXAMPLE:
Exporters earned $50M.
They wanted to sell all of it to local banks.
Local Banks can only buy $25M. (Demand is low)
CB steps in to buy the balance from the sellers.

58. 2.3. Multiple Exchange Rates
To have buyers and sellers transact at different exchange rates
Exchange Rate
Buyers & Sellers
P 21
for sellers of traditional exports
22.50
For ordinary buyers and sellers of dollars 24
For buyers of luxuries and consumer goods

59. 3) Tariffs and Subsidies Tariffs:
are taxes imposed on imports which are based on either the value of the product (ad valorem) or on the physical unit of measure.
Subsidies:
The government has to dole out in equivalent pesos in order to achieve a foreign exchange balance or strength.