FDNECON 03 · Money and Monetary Policy

Unit of account.

The price list uses a common measure of value, which is the unit-of-account role. Actually paying for the meal would emphasize exchange; holding funds for a later purchase would emphasize storing value.

Money carries value over time, but inflation can reduce what a fixed nominal amount buys.

The function concerns carrying purchasing power between periods. Its effectiveness can deteriorate when prices rise; it does not promise constant purchasing power or a fixed interest return.

20%: five baskets become four.

Initially 500/100=5 baskets; later 500/125=4. The fall is (5−4)/5 ×100=20%. The price rose 25%, but inverse comparisons have different bases.

It lowers quantity of money demanded by movement along the curve.

Interest is the vertical-axis variable. Changing it traces a different point on a given downward-sloping demand curve; a non-axis determinant such as real GDP can shift that curve.

Money demand shifts right and the equilibrium interest rate rises.

The lecture identifies real GDP as a money-demand shifter. With vertical supply fixed, the rightward demand shift raises the interest rate needed to equate the quantity demanded with supply.

Its quantity is treated as policy-determined rather than varying with the interest rate in that diagram.

A vertical curve fixes the horizontal-axis quantity across interest rates. This is the specified introductory model and should not be turned into a complete description of all banking behavior.

Money supply rises → equilibrium rate falls → interest-sensitive spending is encouraged.

At unchanged demand, more supply intersects demand at a lower rate. Borrowing can become cheaper and saving less rewarded, encouraging spending, though the later output and price effects depend on circumstances.

Supply left; interest rate up, with demand fixed.

Less money supply at a fixed demand curve raises the equilibrium rate. This restrains interest-sensitive demand; raising taxes instead identifies a fiscal instrument.

Its payment adds funds to the financial system, expanding monetary supply in the stated model.

Focus on the direction of the central bank’s payment. A purchase supplies funds; a sale absorbs them in this simple policy account. The action is monetary rather than a tax or public-works instrument.

₱16 million.

Required reserves rise from 0.10(800)=₱80m to 0.12(800)=₱96m. Their change is ₱16m. A two-percentage-point increase is not a ₱2m reserve change.

5%.

Set demand equal to supply: 1,000−40r=800, so 40r=200 and r=5. The coefficient and units are supplied by the problem rather than estimated from the course.

It falls from 5% to 3%, a fall of 2 percentage points.

Initial r=(1,000−800)/40=5. New r=(1,000−880)/40=3. Demand remains fixed, but equilibrium moves along it after the supply shift.

It uses monetary conditions and incentives to influence spending and prices through a transmission process.

The lecture’s tools act on money, rates and credit conditions. The measured price index reflects many transactions, so a policy goal should be distinguished from a direct numerical edit to inflation.

The acting authority and instrument: central-bank monetary conditions versus government spending/taxes.

Shared goals do not erase instrument differences. A central-bank securities purchase is monetary, while government infrastructure purchases are fiscal even when both seek stronger activity.

₱1,500.

Old interest=75,000(0.06)=₱4,500; new=75,000(0.08)=₱6,000. The increase is ₱1,500, or principal × the 0.02 rate difference for one year.

More money can chase unchanged output and create inflationary pressure rather than more real goods.

The lecture’s historical example emphasizes a shortage of real goods relative to currency. Creating a means of payment is not the same as creating productive resources or output. Exact inflation is not determined by this story alone.