I.

Money

1. Definition and Functions of Money:

○ Medium of Exchange: Money is used to buy and sell goods/services.
○ Unit of Account: Money provides a standard measure of value.
○ Store of Value: Money preserves value for future use.
○ Standard of Deferred Payment: Money facilitates credit transactions by acting
as a tool for future payments.
2. Types of Money:
○ Commodity Money: Has intrinsic value (e.g., gold, silver).
○ Fiat Money: Has value because of government decree (e.g., paper currency).
○ Bank Money: Deposits or credit money that can be used for payments.
3. Money Supply:
○ M1: Currency in circulation + checkable deposits.
○ M2: M1 + savings accounts + time deposits.
○ M3: M2 + large time deposits + institutional money markets.

II. Credit

1. Definition of Credit:
○ The provision of resources (usually money) from one party to another with the
understanding that it will be repaid later, usually with interest.
2. Types of Credit:
○ Consumer Credit: Loans to individuals (e.g., credit cards, personal loans).
○ Business Credit: Loans to businesses for expansion or operations.
○ Government Credit: Borrowing by governments to finance projects.
3. Credit Creation Process:
○ Banks lend out a portion of deposits, which increases the overall money supply.
○ Fractional Reserve Banking: Banks only keep a fraction of deposits on reserve
and lend out the rest, creating new money in the form of loans.
4. Interest Rates:
○ The cost of borrowing money, set by the market or central banks. It influences
both consumer spending and business investment.
5. Credit Risk:
○ The risk that borrowers will not repay their loans, leading to losses for lenders.
This is mitigated by credit scores, collateral, and loan terms.

III. Banking

1. Functions of Banks:
 ○ Accepting Deposits: Safeguarding customer money.
○ Lending: Providing loans to individuals and businesses.
○ Payment Processing: Facilitating transactions through checks, debit, and
electronic transfers.
○ Investment Services: Offering investment options like bonds, mutual funds.
2. Types of Banks:
○ Commercial Banks: Serve the public by offering deposit, loan, and investment
services.
○ Central Banks: Regulate the money supply and implement monetary policy
(e.g., Bangko Sentral ng Pilipinas).
○ Investment Banks: Help businesses raise capital through the sale of securities.
○ Savings & Loan Associations: Focus on residential mortgages.
3. Monetary Policy Tools:
○ Open Market Operations (OMO): Central banks buy/sell government securities
to influence the money supply.
○ Reserve Requirements: The amount of funds banks must hold in reserve.
○ Discount Rate: The interest rate at which banks can borrow from the central
bank.
4. Banking Regulation:
○ Aimed at maintaining the stability and safety of the financial system. This
includes capital adequacy requirements, deposit insurance, and stress tests
for banks.

IV. Central Banking and Monetary Policy

1. Role of Central Banks:

○ Controlling Inflation: Ensuring price stability through monetary policy.
○ Managing Currency: Issuing and regulating national currency.
○ Lender of Last Resort: Providing liquidity to banks during financial crises.
2. Monetary Policy Objectives:
○ Price Stability: Controlling inflation through interest rates.
○ Full Employment: Encouraging economic activity to reduce unemployment.
○ Economic Growth: Maintaining conditions for steady growth.
3. Inflation and Deflation:
○ Inflation: General increase in prices, which erodes purchasing power.
○ Deflation: General decrease in prices, which can lead to economic stagnation.
4. Interest Rate Policies:
○ Expansionary Policy: Lowering interest rates to encourage borrowing and
investment.
○ Contractionary Policy: Raising interest rates to control inflation and cool down
an overheated economy.
V. Financial Markets and Instruments

1. Money Market:
○ A market for short-term, low-risk financial instruments like treasury bills,
commercial paper, and certificates of deposit (CDs).
2. Capital Market:
○ A market for long-term securities like stocks and bonds. It facilitates investment
and capital formation.
3. Bonds and Securities:
○ Bonds: Debt instruments issued by governments or corporations to raise funds,
promising repayment with interest.
○ Stocks: Equities representing ownership in a company, providing returns in the
form of dividends or capital gains.
4. Banking Crises and Financial Stability:
○ Crises can occur when there is a loss of confidence in financial institutions,
leading to bank runs, defaults, or collapses. Financial regulations and central
bank interventions aim to prevent or mitigate these crises.

This reviewer covers the essential concepts from Money, Credit, and Banking. Would you like to
expand on any specific area, or do you need more details on any topic?

4o

You said:
yes please

ChatGPT said:
ChatGPT

Which specific topic would you like to explore in more detail? I can break it down further or
explain any particular section you're interested in!

4o

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all

ChatGPT said:
ChatGPT

Sure! I'll provide a deeper dive into each section of Money, Credit, and Banking. Here’s a more
detailed explanation for each topic:
I. Money

1. Functions of Money:
○ Medium of Exchange: Money eliminates the need for a barter system by
providing a standardized way to buy and sell goods/services, improving efficiency
in trade.
○ Unit of Account: It provides a consistent way of measuring the value of goods
and services. For example, we can compare the price of a loaf of bread and a
pair of shoes using a common currency.
○ Store of Value: Money allows individuals to save wealth for future use, although
inflation can reduce its value over time.
○ Standard of Deferred Payment: Money is used in lending or credit systems,
where payments can be postponed to a future date.
2. Types of Money:
○ Commodity Money: Physical items that have value in themselves and can also
be used as money (e.g., gold, silver, tobacco in colonial America).
○ Fiat Money: Currency that has no intrinsic value but is accepted because of
government backing. Paper bills and coins are fiat money.
○ Bank Money: Consists of demand deposits or checking accounts that can be
used for payments without physically transferring currency.
3. Money Supply:
○ M1: The most liquid part of the money supply, including physical currency,
demand deposits (checking accounts), and traveler's checks.
○ M2: Includes M1 plus near money (savings accounts, small time deposits, and
money market mutual funds).
○ M3: Broadens the definition of the money supply further by including large time
deposits, institutional money market funds, and other larger liquid assets.

II. Credit

1. Definition of Credit:
○ Credit is a contractual agreement where a borrower receives something of value
now (like money) and agrees to repay the lender later, often with interest. This
arrangement fuels economic activity by allowing consumers and businesses to
purchase now and pay later.
2. Types of Credit:
○ Consumer Credit: Credit given to individuals for personal use, such as credit
cards, car loans, or home mortgages.
○ Business Credit: Businesses use loans or credit lines to finance operations,
expansion, or inventory.
○ Government Credit: Governments issue bonds to borrow money, repaid with
interest over time.
 3. Credit Creation Process:
○ Fractional Reserve Banking: Banks only need to keep a fraction of deposits in
reserve, lending out the rest to borrowers. This creates new money in the
economy. For example, if a bank has a 10% reserve requirement, for every 1000
pesos deposited, it can lend out 900 pesos, thus expanding the money supply.
4. Interest Rates:
○ Nominal Interest Rate: The stated rate on a loan or deposit, not accounting for
inflation.
○ Real Interest Rate: The nominal rate adjusted for inflation. It indicates the true
cost of borrowing.
○ Prime Rate: The interest rate that banks charge their best (low-risk) customers.
Other loans often carry higher rates.
5. Credit Risk:
○ Default Risk: The risk that a borrower will fail to make required payments.
○ Creditworthiness: Lenders evaluate borrowers' credit history, income, and debt
levels to determine whether they are likely to repay their loans.
○ Collateral: Property or assets pledged to secure a loan, reducing the lender’s
risk.

III. Banking

1. Functions of Banks:
○ Accepting Deposits: Banks provide a safe place for individuals and businesses
to store money.
○ Lending: Banks provide loans to individuals, businesses, and governments,
allowing them to make large purchases or investments.
○ Payment Processing: Banks facilitate transactions between individuals and
companies, using methods such as checks, electronic transfers, and credit cards.
○ Investment Services: Banks offer services that allow individuals and businesses
to invest in securities, such as bonds, stocks, and mutual funds.
2. Types of Banks:
○ Commercial Banks: Provide financial services to individuals and businesses,
such as accepting deposits, lending, and processing payments.
○ Central Banks: Oversee the monetary policy of a country (e.g., the Federal
Reserve in the U.S. or Bangko Sentral ng Pilipinas). They control inflation,
manage currency, and act as a lender of last resort to the banking system.
○ Investment Banks: Specialize in helping companies raise capital by issuing
stocks or bonds, as well as providing advisory services for mergers and
acquisitions.
○ Savings and Loan Associations: Focus on accepting savings deposits and
making mortgage loans.
3. Monetary Policy Tools:
 ○ Open Market Operations (OMO): Central banks buy or sell government
securities to influence the money supply. Buying securities injects money into the
economy, lowering interest rates, while selling securities withdraws money,
raising rates.
○ Reserve Requirements: The percentage of deposits that banks are required to
keep on hand. Lowering the reserve requirement increases the money supply by
allowing banks to lend more.
○ Discount Rate: The interest rate charged by central banks on loans to
commercial banks. Lower rates make borrowing cheaper, encouraging banks to
lend more.
4. Banking Regulation:
○ Capital Adequacy: Banks must hold a certain amount of capital to reduce the
risk of insolvency.
○ Deposit Insurance: Protects depositors’ money in case of bank failures, such as
the FDIC in the U.S. or PDIC in the Philippines.
○ Stress Tests: Simulations that test a bank’s ability to withstand financial shocks,
ensuring stability.

IV. Central Banking and Monetary Policy

1. Role of Central Banks:

○ Central banks manage a country’s currency, money supply, and interest rates to
stabilize the economy.
○ Inflation Control: Central banks adjust monetary policy to control inflation by
manipulating interest rates and money supply.
○ Economic Stability: By managing inflation and employment levels, central
banks help maintain stable economic growth.
2. Monetary Policy Objectives:
○ Price Stability: Maintaining stable inflation rates ensures that money retains its
purchasing power.
○ Full Employment: Central banks work to keep unemployment low, balancing
economic growth with inflation control.
○ Economic Growth: Through low interest rates and ample credit, central banks
can stimulate business investment and consumer spending.
3. Inflation and Deflation:
○ Inflation: Rising prices over time reduce the purchasing power of money,
meaning people need more money to buy the same goods.
○ Deflation: A decline in prices can lead to reduced economic activity, as
consumers delay purchases and businesses reduce production.
4. Interest Rate Policies:
○ Expansionary Policy: Central banks lower interest rates to encourage borrowing
and spending, stimulating the economy.
 ○ Contractionary Policy: To combat inflation, central banks raise interest rates to
reduce borrowing and cool down the economy.

V. Financial Markets and Instruments

1. Money Market:
○ The money market deals in short-term, highly liquid, and low-risk financial
instruments. These include Treasury Bills, Commercial Paper, and
Certificates of Deposit (CDs), which are used by governments, corporations,
and financial institutions for short-term financing.
2. Capital Market:
○ The capital market is for long-term investments, where individuals, companies,
and governments trade securities like stocks and bonds to raise long-term funds.
3. Bonds and Securities:
○ Bonds: These are debt instruments that represent loans made by investors to
borrowers. They pay periodic interest and return the principal at maturity.
○ Stocks: Equities representing ownership in a company. Investors can earn
returns through dividends and capital gains.
4. Banking Crises and Financial Stability:
○ Banking crises occur when banks face liquidity problems or massive loan
defaults, causing them to fail. Central banks and government regulators step in
with bailouts, monetary easing, or tighter regulations to restore stability..