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7/31/2019 Investment and Financial Markets
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Investment, Financial
Systems and Monetary PolicyEconomics 101
C. Arcilla
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In this lecture. . .
We explain interest rates and money
Money, money, money function and brief history
We discover the economic role of the financialsystem Financial Markets
Financial intermediaries
Central bank and monetary policyInterest
Monetary Policy
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Investment
purchase of new capital goods
machines, equipment, buildings, or houses
vs. financial investment (purchase of newfinancial assets)
money vs. capital
capital as value put into the production
process to yield more value
money as a store of value
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Money, money, money
Moneyis the set of assets in an economythat people regularly use to buy goods and
services from other people.Is the most liquid form of asset
Liquidityis the ease with which an asset can
be converted into the economys medium ofexchange.
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Money, money, money
Functions of money
As medium of exchange -an item that buyersgive to sellers when they want to purchase
goods and services. It can be anything that isreadily acceptable as payment.
A store of valueis an item that people can use totransfer purchasing power from the present to
the future.A unit of accountis the yardstick people use topost prices and record debts.
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A brief history of money
Barter an economy without money
Commodity moneytakes the form of acommodity with intrinsic value.
Cattle, stone, cigarrettes, olive oil, beer/wine, gold,silver.
Fiat moneyis used as money because ofgovernment decree.
It does not have intrinsic value.
Coins, currency, check deposits.
E-money
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Financial system
The financial systemis composed offinancial institutions that coordinate theactions of savers and borrowers.
to match one persons saving with another
persons investment.
Financial institutions can be grouped into
two different categories: financial marketsand financial intermediaries.
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FINANCIAL INSTITUTIONSFinancial marketsare the institutions throughwhich savers can directly provide funds toborrowers.
Stock Market Bond Market
Financial intermediariesare financial institutionsthrough which savers can indirectly provide
funds to borrowers. Banks
Mutual Funds
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Financial MarketsThe Bond Market A bondis a certificate of indebtedness that
specifies obligations of the borrowerto the holder of the bond.
The Stock Market Stockrepresents a claim to partial ownership
in a firm and is therefore, a claim to the profitsthat the firm makes.
The most important stock exchangesPhilippine Stock Exchange, New York StockExchange, the American Stock Exchange,
and NASDAQ.
IOU
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The Philippine Stock Exchange
The Philippine Stock Exchange, Inc. ("PSE" or the"Exchange") is a private organization that providesand ensures a fair, efficient, transparent and orderlymarket for the buying and selling of securities.
PSE traces its roots from the country's two formerbourses: the Manila Stock Exchange ("MSE") and theMakati Stock Exchange ("MkSE"). In December 23,1992 the MSE and MkSE were unified to become thePSE.
At present, PSE maintains two trading floors -- one inMakati City and another in its head office in Pasig City,where trading participants trade daily - from 9:30 a.m. to12:10 p.m. except Saturdays, Sundays, legal holidays.
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PHISIX
PSE Composite Index, commonly knownpreviously as the PHISIX and presently asthe PSEi, is the main stock market index
of the Philippine Stock Exchange.The PSEi is the most watched index onthe PSE and is also home to 30 majorPhilippine companies listed on the PSE.
It is also one of the indicators on thegeneral state of the Philippine economy.
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Other Important Financial Markets
NASDAQ The National Association of Securities
Dealers Automated Quotations is an
American stock exchange. Largest US electronic screen-based equity
securities trading market.
With approximately 3,800 companies and
corporations, it has more trading volume perhour than any other stock exchange in theworld
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Financial Intermediaries
Banks is a business institutionthat acceptsdeposits
from savers and use the deposits to make
loans to borrowers for interest. help create a medium of exchangeby
allowing people to write checks against their
deposits.
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Financial Intermediaries
Other Financial Institutions
Credit unions
Pension funds
Insurance companies
Loan sharks
Pawn shops
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The banks of all banks
Bangko Sentral ng Pilipinasrestructured from the Central Bank of thePhilippines in 1994
Its primary objective is to maintain pricestability.
Regulates the supply of money, and
affects the level of interest rate
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BSP's Organizational Structure(as of October 2008)
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BSP governanceThe Monetary Board exercises the powers
and functions of the BSP, such as the conductof monetary policy and supervision of thefinancial system. Its chairman is the BSP
Governor, with five full-time members from theprivate sector and one member from theCabinet.
The Governor is the chief executive officer ofthe BSP and is required to direct andsupervise the operations and internal
administration of the BSP.
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BSP Policy Tools of Monetary regulation
Fiat money authority To finance government borrowing during times of insufficient
revenue, central bank prints new money. Like issuing a checking account to government. While this the easiest method to finance government expenditures, it
most likely causes inflation.
Open market operation Government issues bonds to borrow new money from the generalpublic.
Discount rates The central bank lends money to commercial banks for greater
liquidity at a discount rate (interest rates to banks). BSP as the lender of last resort.
Reserve requirements Raising the reserve requirement reduces money supply through the
deposit multiplier.
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Interest
payment made to lender and cost of borrowingmoneyUsually measured in peso per peso borrowedper year, or interest rate
Pt + n = (1 + i)n Pt
where P = principaln = maturityi = simple interest rate, annually
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Nominal vs. Real i
Nominal i (money interest rate)
yield in peso per peso borrowed per year
Real i
measures the quantity of goods we gettomorrow for goods forgone today.
used in highly inflationary periods
Real i = nominal i inflation rate
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Interest rates
At the micro level, interest rates is affected by:terms or maturity Length of time a loan is to be paid
risk
higher risk loans means higher interestLiquidity Loans on illiquid assets have higher interest
Administrative costs higher administrative costs have higher interest
Central bank policies Central bank determines the general level of interest
rates
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The Demand for Money
The Demand for Money, MdLevels of transaction demand Depends on nominal income, $Y An increase in nominal income increases the
demand for money.Interest rates, i An increase in interest rates decreases the
demand for money.
Md = $Y L(i)+ -
The Effects of an Increase in Nominal
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The Effects of an Increase in NominalIncome on the Demand for Money
Copyright 2004 South-Western
Quantity ofMoney
Interest ratei
Moneydemand
0
3
11. An increasein the nominalincome . . .
Moneydemand
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Money upply Money Demand and the
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Money upply, Money Demand, and theinterest rate
Copyright 2004 South-Western
Quantity ofMoney
Interest rate, i
Quantity fixedby the BSP
Money supply
0Money
demand
A
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What happens to i
Increase in money supply (monetaryinjection)
Say because of a change in monetary policy
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Next meeting. . .
Monetary policy of the BSP
The macroeconomic role of commercialbanks
Money multiplier