SAINT JOSEPH COLLEGE OF SINDANGAN INCORPORATED

National Highway, Poblacion, Sindangan, Zamboanga del Norte

COLLEGE OF BUSINESS ADMINISTRATION

FM13 (Financial Marketing)

Chapter 2 Handout: Introducing Money and Interest Rates

1. ROLE OF MONEY IN THE ECONOMY

Money is any item or commodity that us generally accepted as a means of payment for goods and
services or for repayment of debt, and that serves as an asset to its holder. On the simplest level, money is
composed of the bills and coins which have been printed or minted by the National Government (these are
called currency).

Money is essential because it:

 Facilitates trade and exchange

 Eliminates the inefficiencies of barter
 Serves as a foundation for economic activity
 Enables saving, investing, and economic planning

� Without money, modern economies cannot function efficiently.

2. CHARACTERISTICS AND KEY FUNCTIONS OF MONEY

Money is not money unless it has all of the following defining characteristics. Money must have value, be
durable, portable, uniform, divisible, in limited supply, and be usable as a means of exchange. Underlying all of
these characteristics is trust — people must be confident that if they accept money, they can use it to pay for
goods.

Store of value
Money acts as a means by which people can store their wealth for future use. It must not, therefore, be
perishable, and it helps if it is of a practical size that can be stored and transported easily.
Examples:
 Saving ₱5,000 in a bank to use next month
 Keeping emergency money at home
 Depositing money in a savings account
� Unlike food (which spoils), money can be stored for long periods.

Item of worth
Most money originally has an intrinsic value, such as that of the precious metal that was used to make the coin.
This in itself acted as some guarantee the coin would be accepted.
Examples:
References: Ma. Elenita Balatbat Cabrera, Gilbert Anthony B. Cabrera (2020) “Financial Markets and Institutions”

Prepared by: MARY MAY E. CALAMBA, LPT, MBA

BSBA Full-time Instructor
 Gold coins have value because gold is valuable
Old silver coins worth money due to metal content
Modern paper money has value because the government guarantees it
� Before, value came from the material; today, it comes from trust in the government.

Means of exchange
It must be possible to exchange money freely and widely for goods, and its value should be as stable as possible.
It helps if that value is easily divisible and if there are sufficient denominations so change can be given.
Examples:
 Paying ₱20 for a jeepney ride
 Buying food using cash or GCash
 Paying for groceries at the supermarket
� Money replaces barter and makes trade easier.

Unit of account
Money can be used to record wealth possessed, traded, or spent—personally and nationally. It helps if only one
recognized authority issues money. If anybody could issue it, then trust in its value would disappear.
Examples:
 A notebook costs ₱30
 A student’s monthly allowance is ₱2,000
 A company records profits in pesos
� Money helps track income, expenses, and value.

3. EVOLUTION OF MONEY
� Stages of Development:
1. Barter System
o Direct exchange of goods/services
o Problem: Double coincidence of wants
2. Commodity Money
o Goods like gold, salt, or rice used as money
3. Metallic Money
o Coins made of precious metals
4. Paper Money
o Government-issued currency
5. Digital/Electronic Money
o Online banking, e-wallets, cryptocurrencies
� Evolution made transactions faster, safer, and more efficient.

4. HISTORY OF MONEY IN THE PHILIPPINES

1. Pre-colonial: barter and gold (Before 1521)

This stage is characterized by the use of the barter system and commodity money, where goods and
gold (such as piloncitos) were directly exchanged without a standardized currency.
Examples:
 Barter system: A farmer trades rice for fish
References: Ma. Elenita Balatbat Cabrera, Gilbert Anthony B. Cabrera (2020) “Financial Markets and Institutions”

Prepared by: MARY MAY E. CALAMBA, LPT, MBA

BSBA Full-time Instructor
 Piloncitos: Small gold pieces used as money

Gold jewelry: Used as a form of wealth and exchange

� Money was based on gold and direct trade.

2. Spanish era: silver coins (peso)

This period introduced a formal coin-based monetary system, where silver coins like the peso were
widely used and became the standard medium of exchange in the Philippines.
Examples:
 Use of silver coins (peso) from Mexico
 Galleon Trade brought foreign coins into the country
 “Real de a ocho” (Spanish dollar) widely used
� The Philippines adopted a coin-based monetary system.

3. American period: modern currency system

This stage marked the transition to a modern monetary system, with the introduction of paper money
and a currency system aligned with the U.S. dollar, improving stability and uniformity.
Examples:
 Introduction of paper money
 Coins and bills aligned with the US dollar system
 Establishment of a more organized currency system
� Modern money system began to develop.

4. Present: Managed by the Bangko Sentral ng Pilipinas (BSP)

This stage is defined by a nationally controlled and regulated monetary system, managed by the Bangko
Sentral ng Pilipinas, featuring modern currency and the growing use of digital and electronic money.
Examples:
 Creation of the Bangko Sentral ng Pilipinas (BSP)
 Issuance of modern peso bills and coins
 Use of digital payments like GCash and Maya
 QR payments and online banking
� Money is now regulated, stable, and increasingly digital.

5. THE SUPPLY AND DEMAND FOR MONEY

Money facilitates the flow of resources in the circular model of macroeconomy. Not enough money will slow
down the economy, and too much money can cause inflation because of higher price levels. Either way,
monitoring the supply and demand for money is vital for the economy’s central bank’s monetary policy, which
aims to stabilize price levels and to support economic growth.

The Money Supply

Although the general description of money is relatively straightforward, the precise definition of the
overall supply of money is complex because of the wide variety of forms of money in modern economies.

The Key Measures for the Money Supply are:

References: Ma. Elenita Balatbat Cabrera, Gilbert Anthony B. Cabrera (2020) “Financial Markets and Institutions”

Prepared by: MARY MAY E. CALAMBA, LPT, MBA

BSBA Full-time Instructor
• M1. The narrowest measure of the money supply. It includes currency in circulation held by the nonbank
public, demand deposits, other checkable deposits, and traveler’s checks. M1 refers primarily to money used as
a medium of exchange.

• M2. In addition to M1, this measure includes money held in savings deposits, money market deposit accounts,
noninstitutional money market mutual funds and other short-term money market assets (e.g., “overnight”
Eurodollars). M2 refers primarily to money used as a store of value.

• M3. In addition to M2, this measure includes the financial institutions (e.g., large-denomination time deposits
and term Eurodollars). M3 refers primarily to money used as a unit of account.

• L. In addition to M3, this measure includes liquid and near-liquid assets (e.g., short-term Treasury notes, high-
grade commercial paper and bank acceptance notes).

The deposits of the public at banks and other depository institutions are considered money and are therefore
included in the M1 money supply. If the public withdraws money from bank deposits to hold money as personal
currency (“under the mattress”), this increase in inactive money will affect the banks’ ability to extend loans
and will influence the supply of money.

Some common forms of public payment may not count as part of the supply of money. Check payments from
one person to another are not included in the money supply because check merely transfers money without
being a net addition to the supply of money. Consumer credit cards are not included in the money supply; they
are considered instant loans to consumers and therefore are not a net addition to the money supply.

The Bangko Sentral ng Pilipinas (BSP) is responsible for determining the supply of money. It uses daily open
market operations to influence the creation of money by banks and to guide the availability of money in the
economy. BSP also has an impact on the creation of money by banks through reserve requirements and the
discount rate that is, the interest rate at which banks can borrow from the BSP as a lender of last resort. Changes
in the supply of money will affect the interest rate and therefore the cost of borrowing money. This will have an
impact on consumption and investment levels in the economy.

The Demand for Money

The Sources of the Demand for Money are:

• Transaction demand. Money demanded for day-to-day payments through balances held by households and
firms (instead of stocks, bonds or other assets). This kind of demand varies with GDP; it does not depend on the
rate of interest.
• Precautionary demand. Money demanded as a result of unanticipated payments. This kind of demand varies
with GDP.
• Speculative demand. Money demanded because of expectations about interest rates in the future. This means
that people will decide to expand their money balances and hold off on bond purchases if they expect interest
rates to rise. This kind of demand has a negative relationship with the interest rate.

Money affects growth by:

 Encouraging investment
 Supporting business expansion
 Increasing consumption
 Promoting financial stability
References: Ma. Elenita Balatbat Cabrera, Gilbert Anthony B. Cabrera (2020) “Financial Markets and Institutions”

Prepared by: MARY MAY E. CALAMBA, LPT, MBA

BSBA Full-time Instructor
� Too much money → inflation
� Too little money → slow growth

7. NATURE AND DETERMINATION OF INTEREST

Interest is the cost of borrowing money or the reward for saving.

Example:
Borrowing Money (Cost of Interest)
 Using a credit card from BDO Unibank and paying interest if not fully paid
 Buying appliances on installment (may dagdag na interest)
 Borrowing money (utang) with added payment
� You pay interest when you borrow.

Example:
Saving Money (Earning Interest)
 Depositing money in a savings account in Land Bank of the Philippines
 Opening a time deposit that earns higher interest
 Earning small interest from regular savings accounts
� You earn interest when you save.

� Determined by:
 Supply of money
 Demand for loans
 Inflation expectations
 Central bank policies

Higher risk = higher interest rate

Lower risk = lower interest rate
� Examples:
 Government bonds → low risk, low interest
 Business loans → higher risk, higher interest
� Lenders charge more to compensate for risk.

9. EFFECTS OF CHANGES IN INTEREST RATES

Interest rates influence how much people borrow, spend, save, and invest. When interest rates change,
they affect the overall economic activity of a country.

1. When Interest Rates DECREASE

(Lower interest rates = cheaper borrowing)

Effects:
 More people borrow money
 Increase in spending and consumption
 Businesses expand and invest more

References: Ma. Elenita Balatbat Cabrera, Gilbert Anthony B. Cabrera (2020) “Financial Markets and Institutions”

Prepared by: MARY MAY E. CALAMBA, LPT, MBA

BSBA Full-time Instructor
 Economy grows faster
Examples:
 A family takes a housing loan because interest is low
 More Filipinos buy appliances via installment
� Result: Economic growth (but may lead to inflation if too much spending)

2. When Interest Rates INCREASE

(Higher interest rates = expensive borrowing)

Effects:
 Less borrowing
 Decrease in spending and investment
 People prefer to save money
 Economic activity slows down
Examples:
 Fewer people apply for housing or car loans
 Businesses delay expansion due to high loan costs
 Consumers reduce spending (tipid mode)
 More people save in banks to earn higher interest
� Result: Inflation is controlled, but growth may slow

Role of Government
The Bangko Sentral ng Pilipinas (BSP) adjusts interest rates to:
 Control inflation
 Encourage or slow down economic activity

Simple Comparison
Interest Rate Change Effect on People Effect on Economy
� Decrease Borrow & spend more Economy grows
� Increase Save more, spend less Economy slows

� Interest rates are a key tool for managing the economy.

Example Scenario
 If BSP lowers interest rates, Juan takes a loan to open a food business → creates jobs
 If BSP raises interest rates, Maria postpones buying a house → less spending in the economy

References: Ma. Elenita Balatbat Cabrera, Gilbert Anthony B. Cabrera (2020) “Financial Markets and Institutions”

Prepared by: MARY MAY E. CALAMBA, LPT, MBA

BSBA Full-time Instructor
 SAINT JOSEPH COLLEGE OF SINDANGAN INCORPORATED
National Highway, Poblacion, Sindangan, Zamboanga del Norte

COLLEGE OF BUSINESS ADMINISTRATION

Activity Worksheet 2
FM13 (Financial Marketing)

Name: ____________________________________Date: _____________________________

Functions of Money in Real Life

Instructions: Observe your daily life for 2–3 days. Identify situations where money is used. Then complete the
tasks below.

Part 1: Real-Life Observation (10 Items)

List 10 real-life situations where money is used in your home or community.

For each situation, identify the function of money used:

 Medium of Exchange
 Unit of Account
 Store of Value
 Standard of Deferred Payment

Example:
 Buying snacks at a sari-sari store → Medium of Exchange

Your Turn:

1. __________________________________ → ______________________
2. __________________________________ → ______________________
3. __________________________________ → ______________________
4. __________________________________ → ______________________
5. __________________________________ → ______________________
6. __________________________________ → ______________________
7. __________________________________ → ______________________
8. __________________________________ → ______________________
9. __________________________________ → ______________________
10. __________________________________ → ______________________

References: Ma. Elenita Balatbat Cabrera, Gilbert Anthony B. Cabrera (2020) “Financial Markets and Institutions”

Prepared by: MARY MAY E. CALAMBA, LPT, MBA

BSBA Full-time Instructor
Part 2: Reflection
How is money important in your daily life and family?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
_________________________________________________________.

� Reminder

 Be honest and base your answers on real experiences.

 Write clearly and neatly.
 Submit on May 21, 2026.

References: Ma. Elenita Balatbat Cabrera, Gilbert Anthony B. Cabrera (2020) “Financial Markets and Institutions”

Prepared by: MARY MAY E. CALAMBA, LPT, MBA

BSBA Full-time Instructor