ECONOMIC POLICY

Economic Policy
Use or needed to attain economic objectives/goals
such as:
- economic growth and development
- economic efficiency
- equity
- economic stability
Can influence the level of aggregate demand and
aggregate supply

Fiscal policy
From the root word fisc which refers to the
treasury of a government

the spending and taxing policies used by the

government to influence the economy

Fiscal policy
Three (3) categories
1. policies concerning government
purchases of goods and services
2. policies concerning transfer payments
to household
3. policies concerning taxes

Fiscal policy
Fiscal functions
1. resource allocation function
2. regulatory function
3. redistributive function
4. economic stabilization function

Fiscal policy
Sources of public funds
1. Taxes
2. Non-tax revenues
a. Fines and fees
b. Licenses and registration charges
c. Profits earned by government-operated and controlled
corporation
3. Borrowing
a. Internal (central bank)
b. External (foreign governments)

Fiscal policy
Uses of public funds
- Social services
- Economic services
- Defense
- General public services
- Debt service fund

Fiscal policy
Expansionary fiscal policy
- an increase in government spending or
a reduction in net taxes aimed at increasing
aggregate output (income)

Fiscal policy
Contractionary fiscal policy
- a decrease in government spending or
an increase in net taxes aimed at decreasing
aggregate output (income)

Fiscal policy
Discretionary fiscal policy
- the changes in taxes or spending that
are the result of deliberate changes in
government policy.

Fiscal policy
Budget deficit (Fiscal deficit)
- the difference between what a government
spends and what it collects in taxes in a given
period. (Negative saving)
Budget surplus (Fiscal surplus)

Monetary policy
- The behavior of the central bank concerning the
nations money supply (Case and Fair)

- Tools used to control the money supply to affect

the overall price level, interest rates and
exchange rates, unemployment rate and level of
output. (Sicat)

Money supply
- Total amount of money that circulates in
the economy
- is composed of: currency in circulation,
checking accounts, savings and time deposits,
short-term debt instruments (bonds, warehouse
receipts and letters of credit, royalties and stock
certificates), goods

Money
anything that is generally accepted as a medium
of exchange
is not income
is not wealth

Functions of money
Medium of exchange or means of payment
- what sellers generally accept and buyers generally use
to pay or goods and services
Store of value
- an asset that can be used to transport purchasing
power from one time period to another
Unit of account
- a standard unit that provides a consistent way of
quoting prices

Evolution of money
Barter an alternative to a monetary economy
- the direct exchange of goods and services in
exchange for other goods and services
Commodity monies items used as money that
also have intrinsic value in some other use
Fiat, or token money items designated as
money that are intrinsically worthless

 Liquidity property of money

the property of money that makes it a good
medium of exchange as well as a store of value
Legal tender
- money that a government has required to
be accepted in settlement of debts

 Currency debasement
- the decrease in the value of money that
occurs when its supply is increased rapidly
Quantity theory of money
- the level of prices is due to the amount of
money in circulation

Definitions of money
M1 (Transactions money) = cash and checking
deposits
- money that can be directly used for
transactions
M2 (Broad money) = M1 + savings deposits +
time deposits/money market accounts
M3 = M2 + other deposit substitutes

Money and Banking

Commercial bank a business institution that accepts deposits of
money and lends to borrowers in return for interest
Bangko Sentral ng Pilipinas
- the central bank of the Philippines
- responsible for the regulation of money supply and the
financial system
Monetary board
- policy board of the central bank who sets policies that regulate
money supply

Monetary tools
Reserves
- the deposits that a bank has at the central
bank plus its cash on hand
Required reserve ratio
- the percentage of its total deposits that a
bank must keep as reserves at the central bank

Monetary tools
Discount rate
- interest rate that banks pay to the central
bank to borrow from it
Open-market operations
- the purchase and sale by the central bank of
government securities in the open-market

Monetary tools
Moral suasion
- the pressure exerted by the central bank to
discourage banks from borrowing heavily from
the central bank

Demand for money

Transaction motive
- the main reason that people may hold
money to buy things
Speculation motive
- one reason for holding bonds instead of
money

 Contractionary/tight monetary policy

- central banks policies that contract money
supply in an effort to restrain the economy
Expansionary/easy monetary policy
- central bank policies that expand the money
supply in an effort to stimulate the economy

Monetary standards
The gold standard
Bretton Woods system
Floating rates

Trade policy
- policy applied to international trade (exports
and imports)
Tariff
a. Revenue tariff tax on imports designed
to raise revenues for the government
b. Prohibitive tariff tax on imports that is
high enough to prevent or to restrict imports

Trade policy
Import controls
Trade quotas
a. import quotas
b. production quotas ( exports)

 Terms of trade
-the ratio at which a country can trade
domestic products for imported products

Balance of trade
- the difference in value over a period of
time between a country's imports and
exports of goods and services.
(www.merriam-webster.com)

Trade surplus
Trade deficit

Free trade
When trade is free unimpeded by governmentinstituted barriers-patterns of trade and trade
flows result form the independent decisions of
thousands of importers and exporters and
millions of households and firms.

Protectionism
The practice of shielding a sector of the
economy from foreign competition
E.g. tariff, export subsidies, dumping, quota
Dumping
- a firm or industry sells products on the
world market at prices below cost of production

Exchange rate
The ratio at which two currencies are traded for
each other
1. Fixed exchange rate system
2. Managed currency system
3. Floating exchange rate system

Balance of payments
The record of a countrys transactions in
goods, services and assets with the rest of
the world.
The record of a countrys sources (supply)
and uses (demand) of foreign exchange