CHAPTER 1: NATURE, PURPOSE AND SCOPE

OF FINANCIAL MANAGEMENT
Financial Management (Managerial finance,
corporate finance and business finance)

Is a decision making process concerned

with planning, acquiring and utilizing funds
in a manner that achieves the firm's
desired goals?
Described as a process for and the
analysis of making financial decisions in a
business context.

Goals of Financial Management

To make money and add value for the

owners.

To maximize the current value per share of

the existing stock or ownership in a
business firm. (Entitled only to what is left
after employees, supplier, creditors and
anyone else with a legitimate claim are
paid their due.)

Scope of Financial Management

Financial
management
is
primarily
concerned with acquisition, financing and
management of assets of business
concern in order to maximize the wealth of
the firm for its owners.
Basic responsibility of Financial Manager is
to acquire funds needed by the firm and
investing those funds in profitable
ventures that will maximize the firm's
wealth as well as generating returns to the
business concern.

3. The best patter of financing the assets

Types of Financial Decisions
All these decisions aim to maximize the
shareholders' wealth through maximization of the
firm's wealth.
1. Investment decisions - those which
determine how scarce or limited resources
in terms of funds of the business firms are
committed to projects.
2. Financing decisions - assert that the
mix of debt and equity chosen to finance
investments should maximize the value of
investments made.
3. Dividend decisions - concerned with the
determination of quantum profits to be
distributed to the owners, the frequency of
such payments and the amounts to be
retained by the firm.
Significance of Financial Management
The importance of financial management is
known for the following aspects:
1. Broad applicability

Any organization whether motivated with

earning profit or not having cash flow
requires to be viewed from the angles of
financial discipline.

The principles of finance are applicable

wherever there is cash flow.

The concept of cash flow is important

because the financial health of the firms
depends on its ability to generate
sufficient amounts of cash to pay its
employees, suppliers, creditors, and
owners.

Financial
management
is
equally
applicable to all forms of business. Also to
nonprofit organizations.

Functions of Financial Manager

1. Procurement of short-term as well as longterm funds from financial institutions
2. Mobilization of funds through financial
instruments
3. Compliance with legal and regulatory
provisions relating to funds procurement ,
use
and
distribution
as
well
as
coordination of the finance function with
the accounting function
The Finance manager is expected to analyze
the business firm and determine the ff:

2. Reduction of chances of failure

3. Measurement of return on investments

Financial management studies the riskreturn per option of the owners and the
time value of money.

It considers the amount of cash flows

expected to be generated for the benefit

1. The total funds requirements of the firm

2. The assets or resources to be acquired and

The strength of business lies in its financial

discipline.

of owners, the timing and risk attached to

these cash flows.

The greater the time and risk, the greater

is the rate of return required by the
owners.

The responsibility of a finance manager is to

provide a basis and information for strategic
positioning of the firm in the industry.

The strategic financial planning is likewise

needed to counter the uncertain and
imperfect market conditions and highly
competitive business environment.

The strategic planning should concentrate on

multidimensional objectives like

Relationship
between
Financial
Management, Accounting and Economics
1. Financial Management and Accounting

The finance manager will make use of

the accounting information in the
analysis and review of the firm's
business position in decision making.

1. Profitability,
2. expansion growth,
3. survival,

2. Financial Management and Economics

4. leadership,

The concept of microeconomics helps

finance manager in decisions like
pricing, taxation, determination of
capacity and operating levels, breakeven analysis, and volume -cost-profit
analysis etc.
The success of the business firm is
influenced by the overall performance
of the economy and is dependent upon
the money and capital markets, since
the investible funds are to be procured
from the financial markets.
The finance manager should also look
into the other macroeconomic factors
like the rate of inflation, real interest
rates, levels of economic activity,
trade cycles, market competition,
international business conditions, forex
rates, bargaining power of buyers etc.

CHAPTER 2: RELATIONSHIP OF FINANCIAL

OBJECTIVES TO ORGANIZATIONAL STRATEGY
AND OTHER ORGANIZATIONAL OBJECTIVES
Objectives of Business Firms

5. business success,
6. positioning of the firm
7. Reaching global markets and
8. Brand positioning.

The financial policy should align with the

company's strategic planning.

Business plan reflects how it plans to achieve

its goal and objectives

A plan's success depends on an effective

analysis of market demand and supply.

The plan must also include competitive

analyses,
opportunity
assessments
and
consideration of business threats.

Historical financial statements provide insight

into the success of a company's strategic plan
and are important input of the planning
process.

It highlights potions of the strategic plan that

proved profitable and thus, warrant additional
capital investment.

It also reveals areas that are less effective

and provide information to help managers
develop remedial action.

The resulting financial statements provide

input into he planning process for the
following year.

Understanding a companys strategic plan

helps focus our analysis of the company's
short term and long term financial objectives
by placing them in proper context.

1. It is the goal of the company to be a

leader in technology in the industry or
2. To achieve profits through a high level
manufacturing efficiency or
3. To achieve a high degree of customer
satisfaction
Strategic Financial Management

Strategic Financial Planning - involves

financial planning, financial forecasting,
provision of finance and formulation of finance
policies which should lead the firm's survival
and success.

SHORT-TERM AND LONG-TERM FINANCISL

OBJECTIVES OF A BUSINESS ORGANIZATION
PRIMARY FINANCIAL OBJECTIVES OF A FIRM
Short and Medium Term
1. Maximization of return on capital employed or
return on investment
2. Growth
in
earnings
per
share
and
price/earnings ratio through maximization of
net income or profit and adoption of optimum
level of leverage
3. Minimization of finance charges
4. Efficient procurement and utilization of short
term, medium term and long term funds.
Long Term
1. Growth in the market value of the equity
shares through maximization of the firm's
market share and sustained growth in
dividend to shareholders
2. Survival and sustained growth of the firm

The wealth maximization goal is advocated on

the following grounds:
1. It considers
money

2. It considers all future cash flow, dividends

and earnings per share.it suggest the
regular and consistent dividend payments
to the shareholders.
3. The financial decisions are taken with a
view to improve the capital appreciation of
the share price.
4. Maximization of the firm's value is
reflected in the market price of share since
it depends on shareholder's expectations
regarding profitability, long run prospects,
timing
difference
of
return,
risk
distribution of returns of the firm.
RESPONSIBILITIES TO ACHIEVE FINANCIAL
OBJECTIVES
1. Investing
o

The finance manager is responsible for

determining how scarce resources or
funds are committed to projects.

The
investing
function
managing the firm's assets.

Asset mix refers to the amount of pesos

invested in current and fixed assets.

The investment decisions should aim at

investments in assets only when they are
expected to earn a return greater than a
minimum acceptable return which is also
called hurdle rate.

Examples

Competing viewpoints as to the primary

financial objectives of the business firm
1. The owner's perspective which hold that the
only appropriate goal is to maximize
shareholder or owner's wealth and,
2. The
stakeholders'
perspective
which
emphasizes
social
responsibility
over
profitability (stakeholders include not only the
owners and shareholders but also the
business's customers, employees and local
commitments.

Adam Smith - first and well known proponent

1. He argued that in capitalism, an individual
pursuing his own interest tends to
promote the good of his community.

The primary financial goal of the firm is to

maximize
the
wealth of its existing
shareholders or owners.

Shareholder's wealth depends on both the

dividend paid and the market price of the
equity shares.

Wealth is maximized by providing the

shareholders
with
target
attainable
combination of dividends per share and share
price appreciation.

the risk and time value of

deals

with

1. Evaluation and selection of capital

investment proposal
2. Determination of the total amount of
funds that a firm can commit for
investment
3. Prioritization
alternatives.

of

investment

4. Funds allocation and its rationing

5. Determination
of
the
levels
investment in working capital

of

6. Determination of fixed assets to be

acquired

7. Asset replacement decisions

ROLE OF FINANCE MANAGER

8. Purchase or lease decisions

1. Financial Manager makes decisions

9. Restructuring reorganization mergers

and acquisition
10. Securities
analysis
management

and

portfolio

2. Financing
o

Analysis and planning

Acquisition of funds

Utilization of funds

2. Impact on Risk and return

The finance manager is concerned with

the ways in which the firm obtains and
manages the financing it needs to support
its investments.

3. Affect the market price of common stock

4. Lead
to
maximization

Shareholder's

Wealth

The financing objective asserts that the

mix of debt and equity chosen to finance
investments should maximize the value of
investments made.

The financial manager makes decisions

involving planning, acquiring and utilizing
funds which involve a set of risk return
tradeoffs.

Examples

The risk return decision will influence not only

the operational side of the business (capital
versus labor) but also the financing mix
(stocks
versus
bonds
versus
retained
earnings)

1. Determination of the financing pattern

of short-term, medium term and long
term funds requirements.
2. Determination of the best capital
structure or mixture of debt and equity
financing

THE FINANCE ORGANIZATION

1. VP Finance or Chief Financial Officer

3. Procurement of funds through the

issuance of financial instruments such
as equity shares, preference shares,
bonds, long term notes etc

a. Controller - cost and financial accounting,

tax
payments
and
management
information systems

4. Arrangement with bankers suppliers

and creditors for its working capital;
medium term and other long term
funds requirements
3. Operating
o

Concerned
with
management

Working capital refers to a short term

asset and its short term liabilities.

working

capital

Tax manage

Cost accounting manager

Financial accounting manager

Data processing manager

b. Treasurer - managing the firm's cash and

credit,
financial
planning
capital
expenditure

Cash manage

Examples

Credit manage

1. The level of cash, securities and

inventory that should be kept on hand

Capital expenditure

2. The credit policy

Financial planning

3. Source of short term financing

4. Financing purchases of goods
CHAPTER 3: FUNCTIONS
MANAGEMENT

OF

FINANCIAL

RELATIONSHIP
FUNCTIONAL
ORGANIZATION

WITH
OTHER
MANAGERS
IN

KEY
THE

Finance is one of the major areas of a

business.

Finance is concerned with all of the monetary

aspects of a business.

2. Transform
them
commodity, and

Finance is an integral part

management and cuts across
boundaries.

3. Sell the transformed product or service to

consumers.

of total
functional

Corporate governance is the process of

monitoring managers and aligning their
incentives with shareholders goals.

The monitors inside a public firm are the

board of directors who are appointer to
represent shareholder's interest.

The
BOD
hires
the
CEO,
evaluates
management
and
can
also
design
compensation contract to tie management
salaries to firm performance.

Sole proprietorship is owned by a single

person who has complete control over
business decisions.

The owner of the sole proprietorship is not

separable from the business and is
personally liable for all debts of the
business.

Advantages
1. Ease of entry and exit - no formal
charter and inexpensive to form and
dissolve.

The monitors outside the firm include

1. Auditors

2. Full ownership and control - has full

control, reaps all profits and bears all
losses.

External auditors examine the firms

accounting systems and comment on
whether financial statements fairly
represents the firm's financial position.

3. Tax savings - tax advantage if the

owner's tax rate is less than the
corporate tax.

2. Analysts

Investment analysts keep track of the

firm's performance, conduct their own
evaluating of the company's business
activities and report to the investment
community.

4. Few government regulations - has

greatest freedom as compared with
any form
o

4. Credit rating agencies

2. Limitations in raising capital -fund

raising ability is limited

Credit analysts examine a firm's

financial strength for its debt holders.

3. Lack of continuity - upon death or

retirement of the owner it ceases to
exist

5. Government - monitors business activities

through the SEC, BIT, BSP.
CHAPTER 4: FORMS OF BUSINESS ORGANIZATION
THE ORGANIZATION OF THE BUSINESS FIRM

The business firm is an entity designed to

organize raw materials, labor and machines
with the goal of producing goods and or
services. Firms
1. Purchase
productive
resources
households and other firms

from

Disadvantages
1. Unlimited liability - owner is
personally liable for any business
debts, owner personal assets can be
claimed by the creditors

3. Investment banks - help firms access

capital markets, also monitor firm
performance.

different

1. Proprietorship

LEGAL FORM OF BUSINESS ORGANIZATION

CORPORATE GOVERNANCE

into

2. Partnership

Partnership is a legal arrangement in

which two or more persons agree to
contribute capital or services to the
business and divide the profits or losses.

General partnership is one in which each

partner has unlimited liability for the debts
incurred by the business

Limited partnership is one containing one

or more general partners and one or more
limited partners.

1. Limited liability - shareholders are

liable to the extent of their investment
only.

Advantages

2. Unlimited life - continues even after

death of owners

1. Ease of formation - little effort and

low start up costs
2. Additional sources of
several financial sources

capital

3. Ease in transferring ownership can easily sell ownership interest

4. Ability to raise capital - can raise

capital through sale of securities

3. Management
base
broader
management base or expertise the
sole proprietorship

1. Time and cost of formation - time

consuming registration

4. Tax implication

2. Regulation
regulation

Disadvantages
1. Unlimited liability - only for general
partners
2. Lack of continuity - may dissolve
upon withdrawal or death
3. Difficulty
of
transferring
ownership - varies with conditions in
the partnership agreement
4. Limitations in raising capital many sources of funds are available
only to corporations

3. Corporation

Corporation is artificial being created by

law and is a legal entity separate and
distinct from its owners
The articles of
among others

incorporation

Microeconomics focuses on the business

and purchasing decision of individual and
firms.

In a market economy goods and service are

distributed through system of prices.

Rationing is an allocation of a limited supply

of a good or resource to users who would like
to have more of it.

When price performs the rationing function,

the good or resource is allocated to those
willing to give up the most other things in
order to obtain ownership rights.

Demand is the quantity of a good or service

that consumers are willing and able to
purchase at a range of prices at a particular
time.

A demand curve shows an inverse relationship

between
the
price
and
quantity
demanded.

5. Authorized shares
Ownership of stock is evidenced by stick
certificate.

The corporate bylaws which are rule that

govern the internal management of the
company are established by the board of
directors
and
approved
by
the
shareholders.
Advantages

government

INTRODUCTION TO MICROECONOMICS

4. Capital stock

greater

CHAPTER
5:
APPLICATION
OS
MICROECONOMICS
AS
A
BASIS
FOR
UNDERSTANDING
THE
KEY
ECONOMIC
VARIABLES AFFECTING THE BUSINESS

2. Name of the corporation

3. Purpose of the corporation

3. Taxes - pay taxes based on income

earned

includes

1. Incorporators

Disadvantages

DEMAND CURVE AND SHIFT

A demand curve shifts when variables other

than price change.

Factors Affecting the Demand for a Product

other than its Price

1. Consumer income and wealth - direct

relationship, as consumer income goes up,
demand for many products goes up ( normal
goods), as income goes down, demand for a
certain goods goes up ( inferior goods)

Inelastic demand indicates flexibility or little

consumer response to a variation in price.
o

2. Price of other goods and services - direct

relationship, as price increases, demand for
substitute goods goes up

Perfectly inelastic - despite an increase

in Price, consumers still purchase the
same amount

3. Price of complement product, inverse

relationship, as price increases, thee demand
for complementary goods decreases.

Relatively inelastic - a percent increase

I. Price results in a smaller percent
reduction in sales

Unitary elastic - the percent change in

qd is equal to percent change in price, a
curve of decreasing slope results. Sales
revenue is constant

Relatively elastic - a percent increase in

pric leads to a larger percent reduction in
purchases

Perfectly elastic - consumers will buy all

product at the market price, but none will
be sold above the market price.

4. Consumer tastes - intermediate relationship,

the effect depends whether the shift is
towards or away from the product.
5. Group
boycott
inverse
boycotting decreases demand

relationship,

6. Size of Market - direct relationship, as size of

the market increases, demand for the product
increases
7. Expectation of price increase - direct
relationship , if the price of the good is
expected to increase in the future, there will
be an increase in demand

Variables that may cause a demand curve

shift include
1. changes in the price of other goods and
services

SUPPLY

Law of supply is a principle that states that,

there will be a direct relationship between the
price of a good and the amount of it offered
for sale.

A supply curve shows the amount of a product

that would be supplied at various price.

It shows a direct relationship between price

and quantity sold

The higher the price the more products would

be supplied.

A change in the market price of the product

results in a shift along the existing supply
curve.

2. Consumer tastes
3. Spendable income
4. Wealth
5. Size of market
THE ELASTICITY OF DEMAND

Price elasticity of demand is defined as the

relationship between percent change in
quantity demanded and percent change in
price. This indicates the degree of consumer
response to variation in price.

SUPPLY CURVE SHIFT

A supply curve shifts occur when supply

variable other than price change.
If the cost to produce the product increase,
the supply curve shift upward and to the left.

Elastic - small ride in price causes consumers

to choose a smaller amount of a product

Elastic demand curve - quantity demander is

highly sensitive to a change in price

Factors Affecting the Supply of a Product

other than its Price

Inelastic - substantial increase in price results

only in a small reduction in quantity
demanded.

1. Prices of other goods - inverse relationship,

greater returns, more production of goods
2. Number of producers - direct relationship,
increase in the number of producers will
cause an increase in supply at a given price

3. Government price controls - price controls

would tend to limit the amount of goods
supplied by holding the price artificially low.

4. Price expectations - direct relationship,

expectation to an increase of price will result
to increase in supply.

IMAPACT ON EQULIBRIUM OF SHIFT IN THE

SUPPLY AND DEMAND SCHEDULE

5. Government subsidies - direct relationship,

subsidies in effect reduce production cost
therefore increase in supply
6. Chang in production costs or technological
advancements - inverse relationship, as
production cost goes up, less supply

Variables that cause a supply curve shift

include
1. changes in
producers

the

number

or

size

of

2. Changes in various production costs

3. Technological advances
4. Government actions

Elasticity of supply measures the percentage

change in qs of a product resulting from a
change in the product price.

Es = % change in qs / % change in price

Elastic supply means that a percentage

increase in price will create a larger
percentage increase in supply

A balance between amount supplied and

demanded will bring out market equilibrium in
the short run.

1. Market prices will bring the conflicting forces

of supply and demand into balance.
2. When a market is in long run equilibrium,
supply and demand will be balance and the
producer's opportunity cost will equal the
market price.
3. Changes in consumer income, prices of
closely related goods, preferences and
expectations as to future prices will cause the
entire demand curve shift.
4. Changes in input prices, technology and other
factors that influence the producer's cost of
production will cause the entire supply curve
shift.
5. The constraint of time temporarily limits the
ability of consumers to adjust to changes in
prices.
6. When a price is fixed below the market
equilibrium, buyers will want to purchase
more than sellers are willing to supply thus
shortage results
7. When a price is fixed above the market
equilibrium level, sellers will want to supply a
larger amount than buyers are willing to
purchase at current price, thus surplus results.
SHORT-RUN TOTAL COST

MARKET RQUILIBRIUM AND PRICING

A market is an abstract concept that

encompasses the force generated by the
buying and selling decisions of economic
participants.
Equilibrium is a state of balance between
conflicting forces, such as supply and
demand.
Short- run market equilibrium - s a time period
of insufficient length to permit decisions
makers to adjust full to a change in market
condition
Long- run market equilibrium - is a time
period of sufficient length to enable decisionmakers to adjust fully to a market change.

Total fixed cost are those that are committed

and I'll not change with different levels of
production. ( rent)
1. Variable cost - cost of variable inputs such
as raw materials, variable labor cost and
variable overhead. These cost are directly
related to the level of production for the
period.
2. Average fixed cost - fixed cost per unit of
production. It goes down consistently as
more units are produced.
3. Average variable cost - total variable costs
divided by the number of units produced.
4. Marginal cost - the added
producing one extra unit.

cost

of

5. Average total cost - total cost divided by

the number of units produced or per unit
cost
6. Fixed cost - cost that does not vary
without output.

The cause of inefficiencies described is

referred to as the law of diminishing returns.
As we try to produce more and more output
with a fixed productive capacity, marginal
productivity will decline.

CHAPTER 6
Introduction to Macroeconomics
It involves the major sectors of the national
economy:
1. Households
2. Business firms
3. Government
4. Foreign sector

Major tool for the analysis of the economy's

performance

Straightforward model of flow of resources

and money movement across the sectors
of the national economy

A business uses inputs from its suppliers to

produce outputs to sell to its buyers.

Outputs - goods and services the business

sells to customers

Inputs - goods and services the business

uses to produce the outputs

Profit is the difference between revenue and

costs.
The main objective of any business in a market
economy is profit maximization.

Gross National Product - the price of all

goods and services produced by labor and
property supplied by the nation's residents.

Two ways to calculate GDP:

1. Income Approach - adds up all income
earned
2. Expenditure Approach - adds up all
expenditures
AGGREGATE DEMAND AND SUPPLY
Effects of changes in price level on the aggregate
demand

Aggregate demand curve illustrates the

relationship between quantity of real GDP
demanded and price level, holding other
things constant.

Demand curve also depicts demand of

consumers, business and government as
well as foreign purchasers

SIGNIFICANCE OF MACROECONOMICS

It focuses on measures of economic output,

employment,
inflation
and
trade
surpluses or deficits.

It also examines the spending of the three

major segments of the economy, consumers,
business and government.

Nominal Gross Domestic Product (GDP) the price of all goods and services produced
by a domestic economy for a year at current
market prices.
Real GDP - the price of all goods and services
produced by the economy at price level
adjusted (constant) prices.
Potential GDP - the maximum amount of
production that could take place in an
economy without putting pressure on the
general level of prices.

GDP gap - difference between Potential GDP

and real GDP.

Positive GDP gap - indicates unemployed

resources in the economy (unemployment)

Negative GDP - indicates that the economy

is running above normal capacity and prices
begin to rise.
Net Domestic
depreciation

Product

GDP

minus

Several reasons why the price level affects

aggregate demand
1. Effect of change in interests rate
2. Effect of change in wealth
3. Effect
of
change
purchasing power

in

international

AGGREGATE SUPPLY

Aggregate supply schedule presents the

relationship between goods and services
supplied and the price level.

Depicts aggregate supply curve as follows

Shift in the aggregate supply curve may be

caused by:
1. Technology improvements
2. Changes in resource availability
3. Changes in resource costs
Equilibrium GDP occurs when the output level
of the economy creates just enough spending to
purchase the entire output.
The effect of the multiplier can be estimated by
examining an economy's MPC (Marginal
Propensity to consume) and MPS (Marginal
propensity to save)
Multiplier = 1/MPS x change in spending

Production

core of any business

Turning inputs into outputs

The inputs used by a business in the production

process can be divided into five big categories
1. Labor refers to inputs supplied by the
various type of workers that enable a
business to function

Depression
recession.

Trough is the date on which the recession

ends and the economy starts heading up
again.

Expansion is the time from the trough,

through recovery and all the way to the
next peak.

deep

and

long

lasting

Effect of Most Recessions in the Economy

2. Capital -another name for all long-lived

physical
equipment,
software
and
structure a business uses in its production

1. Employment - businesses lay off workers

and cut back on hiring

3. Land - actual ground used by a business

2. Retail sales - many store see falling sales

and some close

4. Intermediate inputs - refer to any good

and services purchased from other
businesses and used up in production.

3. Home construction - fewer homes are built

4. Household income - many households see
thie real incomes drop

5. Business know-how - all the knowledge

and
technology
necessary
for
the
production process

Marginal product of labor - extra amount

of output a business can generate by adding
one or more worker

Total cost production - sum of costs for

each of the inputs

Marginal cost - added cost to produce one

or more unit of output

Revenue - amount of money companies get

from selling their products or services

Marginal revenue - added revenue from

producing and selling one or more unit of
output

Short-term profit maximization - focuses on

achieving the highest profit assuming that fixed
costs are constant and cannot be changed.
Long-term profit maximization - assumes that
a business can vary all its inputs even going as
far as shutting down.
Business Cycle

It is a fluctuation in aggregate economic

output that lasts for several years.

Peak is the date on which recession

starts.

Recession is a period of negative GDP

growth. (at least two consecutive quarters)

5. Business profits - business makes less

money
6. Business investment - business spend less
on physical capital
7. Industrial production - factories produce
less
8. Tax revenues - governments collect less
taxes

Fiscal policy refers to decisions about

government spending, taxes and debt in Both
the short run and the long run.
Keynesian approach uses increases in
government spending and cuts in taxes to
fight recessions.

Fiscal stimulus - increases in government

spending and cuts in taxes to fight recessions
MGP (Marginal Propensity to Consume) portion that households spend of each additional
peso they receive.
Amount of overseas leakages - refers to the
transfer of domestic economic stimulus to foreign
market
Monetary policy - pertain to the use of interest
rates, direct lending to financial institutions and
other policy tools to influence the economy and
support the financial system.
GOALS OF MONETARY POLICY
1. Controlling inflation

2. Smoothing out the business cycle

3. Ensuring financial stability

Inflation is a sustained upward movement in

the average price level of goods and services,
usually measure on an annual basis.

1. Control over short term interest rates

2. The discount window

Deflation - decrease in the price levels.

3. Changes in the reserve requirement and

other financial regulations

Term auction facility - where banks can

borrow from the BSP at an interest rate set by
an auction

Supply side economics focuses on the

marginal tax rate.

Two causes of inflation

1. Demand- pull inflation - occurs when
aggregate
spending
exceeds
the
economy's normal full-employment output
capacity.
2. Cost-push inflation - occurs from an
increase in the cost of producing goods
and services.

BSP has the primary responsibility for fighting

recessions.
Three main tools for monetary policy that the
BSP can use: