CHAPTER III

PRODUCTION AND GROWTH

Lesson 1: Global Measures Of Economic Growth

Economists and statisticians use several methods to track economic growth. The most
well-known and frequently tracked is the gross domestic product (GDP). Over time,
however, some economists have highlighted limitations and biases in the GDP
calculation. Organizations such as the Bureau of Labor Statistics (BLS) and the
Organization for Economic Co-operation and Development (OECD) also keep relative
productivity metrics to gauge economic potential. Some suggest measuring economic
growth through increases in the standard of living, although this can be tricky to quantify.

Why Is GDP So Important?

Gross Domestic Product (GDP)
The gross domestic product is the logical extension of measuring economic growth in
terms of monetary expenditures. If a statistician wants to understand the productive
output of the steel industry, for example, he needs only to track the dollar value of all of
the steel that entered the market during a specific period.
Combine the outputs of all industries, measured in terms of dollars spent or invested,
and you get total production. At least that was the theory. Unfortunately, the tautology
that expenditures equal sold-production does not actually measure relative productivity.
The productive capacity of an economy does not grow because more dollars move
around, an economy becomes more productive because resources are used more
efficiently. In other words, economic growth needs to somehow measure the relationship
between total resource inputs and total economic outputs.
The OECD described GDP as suffering from a number of statistical problems. Its
solution was to use GDP to measure aggregate expenditures, which theoretically
approximates the contributions of labor and output, and to use multi-factor productivity
(MFP) to show the contribution of technical and organizational innovation.

Gross National Product (GNP)

Those of a certain age may remember learning about the gross national product (GNP)
as an economic indicator. Economists use GNP mainly to learn about the total income of
a country's residents within a given period and how the residents use their income. GNP
measures the total income accruing to the population over a specified amount of time.
Unlike gross domestic product, it does not take into account income accruing to non-
residents within that country’s territory; like GDP, it is only a measure of productivity, and
it is not intended to be used as a measure of the welfare or happiness of a country.
 The Bureau of Economic Analysis (BEA) used GNP as the primary indicator of US
economic health until 1991. In 1991, the BEA began using GDP, which was already
being used by the majority of other countries. The BEA cited an easier comparison of the
United States with other economies as a primary reason for the change.2 Although the
BEA no longer relies on GNP to monitor the performance of the US economy, it still
provides GNP figures, which it finds useful for analyzing the income of US residents.
There is little difference between GDP and GNP for the US, but the two measures can
differ significantly for some economies. For example, an economy that contained a high
proportion of foreign-owned factories would have a higher GDP than GNP. The income
of the factories would be included in GDP as it is produced within domestic borders.
However, it would not be included in GNP since it accrues to non-residents. Comparing
GDP and GNP is a useful way of comparing income produced in the country and income
flowing to its residents.

Productivity vs. Spending

The relationship between production and spending is a quintessential chicken-and-
egg debate in economics. Most economists agree that total spending, adjusted for
inflation, is a byproduct of productive output. They disagree, however, if increased
spending is an indication of growth.
Consider the following scenario: In 2017, the average American works 44 hours a week
being productive. Suppose there is no change in the number of workers or average
productivity through 2019. In the same year, Congress passes a law requiring all
workers to work 50 hours a week. The GDP in 2019 will almost certainly be larger than
the GDP in 2017 and 2018. Does this constitute real economic growth?
Some would certainly say yes. After all, total output is what matters to those who focus
on expenditures. For those who care about productive efficiency and the standard of
living, this question does not have a clear answer. On the other hand, the law to
increase hours worked requires the average worker to give up six hours per week of
leisure—was that worth it? To bring it back to the OECD model, GDP would be higher,
MFP would be unchanged but if the loss in leisure was not worth the incremental six
hours of wages then the standard of living may have declined even though GDP is
increasing.

Reduced Unemployment in Wartime Is Controversial

Suppose the world becomes mired in a third world war in the future. Most of the nation's
resources are dedicated toward the war effort, such as producing tanks, ships,
ammunition, and transportation; and all of the unemployed are drafted into war service.
With an unlimited demand for war supplies and government financing, the standard
metrics of economic health would show progress. GDP would soar, and unemployment
would plummet.
 Would society be better off? This is not an easy question to answer. Many of the
produced goods might be destroyed and there could be high mortality rates. On the
other hand, many would say that increasing U.S. defense spending in World War II—
which resulted in destroyed production and many casualties was worth it. At the end of
the conflict, the U.S. victoriously emerged as one of the strongest nations after defeating
the Nazis and the militaristic Japanese Empire.
What Is the Major Measure of Economic Growth?
While there are a number of different ways to measure economic growth, the best-
known and most frequently tracked and reported measure is gross domestic product
(GDP).
Which Measure of the Economy Is Better, GDP or GNP?
Gross domestic product (GDP) is a more useful measure of the economy than gross
national product (GNP), which is mostly used to understand the total income of a
country's residents during a certain time period.
What Are the Top 3 Indicators of Economic Growth?
In addition to GDP, two of the other most significant measures of economic growth are
the Consumer Price Index (CPI), which measures pricing power and inflation, and the
Monthly Unemployment report, including weekly non-farm payrolls.

Lesson 2: Productivity as Key Determinant of a Country’s Standard of Living

Why Is Productivity Important in Economics?
The level of productivity is the most fundamental and important factor determining the
standard of living. Raising it allows people to get what they want faster or get more in the
same amount of time. Supply rises with productivity, which decreases real prices and
increases real wages.
Productivity in Economics
In economics, physical productivity is defined as the quantity of output produced by one
unit of input within one unit of time. The standard calculation gives us output per unit of
time, such as five tons per hour of labor. An increase in physical productivity causes a
corresponding increase in the value of labor, which raises wages. That is why employers
look for education and on-the-job training. Knowledge and experience increase the
human capital of the workers and make them more productive.
Feeling productive and actually being productive are two different things. Using the
economic definition of productivity can help us to determine how productive we really
are.
Impact on Wages
To see how productivity raises wages, consider the following example. An employer
offers you $45 to dig a hole in their backyard. Suppose that you have insufficient capital
 goods, such as your bare hands or a spoon. Then, it might take you nine hours to dig the
hole. Your labor is worth just $5 per hour in that case. If you had a shovel instead, it
might have taken you only three hours to dig the hole. The market value of your labor
output just rose to $15 per hour. With a big enough excavator, you might be able to dig it
in 15 minutes and make $180 per hour. In a perfectly competitive market, labor earns its
marginal product.
Role of Technology
New machines, technologies, and techniques are crucial factors in determining
productivity. To take a historical example, consider the economy of the United States in
1790. At that time, nearly 90% of the working population were farmers.1 By 2000, only
1.9% of the population was employed in farming.2 On a percentage basis, agriculture
consumed about 60 times as much labor in 1790. However, agricultural output is
significantly higher today than in the 18th century. That makes food prices much lower
today in real terms, and it frees up workers for other tasks. That is the way economic
growth takes place when technology raises the productive capabilities of the people.
Relationship with Consumption
Growth in productive capital requires periods of underconsumption. Producers must
devote less energy toward making consumable goods so they can build and use new
capital goods. For instance, an office worker cannot create web content while setting up
a new computer. These periods of underconsumption need to be funded, which is why
businesses need investment for new capital projects. Ultimately, consumers must delay
their own satisfaction to supply funding for companies in exchange for more
consumption in the future. That is how capital investment leads to higher productivity
and future economic growth.

Supplemental Reading:
https://www.epi.org/publication/webfeatures_snapshots_archive_03222000/

Four Determinants of Productivity in Economics

Source: Raphael Zeder | Updated Jun 26, 2020 (Published Nov 30, 2019)
Economic productivity is a crucial determinant of living standards. That’s why some
countries have a much higher standard of living than others. Thus, to understand why
certain economies are more productive than others, we have to understand how
productivity is determined. More specifically, there are four determinants of productivity:
physical capital, human capital, natural resources, and technological knowledge. We will
look at each of them in this article.
1) Physical Capital
Physical capital (i.e., capital) describes the stock of equipment and structures that are
used to produce goods and services. That means it represents the tools and
 infrastructure workers use to create products and services. Generally speaking, an
increase in the amount or quality of physical capital leads to an increase in productivity.
To illustrate this, let’s look at a pizza baker, called John. To bake his pizzas, John uses
an oven, a pizza shovel, and a few other tools. That’s considered his physical capital.
Now, assume John wants to increase the number of pizzas he can bake per hour. To do
this, he can buy a dough mixer. This new mixer cuts the time he needs to prepare the
dough in half, which allows him to produce more pizzas more quickly. In other words,
more specialized equipment increases John’s productivity.
Note that capital is considered one of the four factors of production because it is used to
produce other goods and services. However, unlike the other factors, capital is a
produced factor of production. That means, at some point in the past, this input was the
output of a production process itself.
2) Human Capital
Human capital refers to the knowledge and skills that workers acquire through
education, training, and experience. That means it includes all the relevant know-how
that workers have accumulated throughout their life (e.g., school, university, training, on-
the-job learning). Although it is intangible, human capital is similar to physical capital in
many ways. Thus, an increase in the availability of human capital usually leads to higher
productivity.
For example, John didn’t start as an experienced pizza baker. As a kid, he worked at a
local restaurant as a kitchen aid. Although he mainly washed dishes and brought out the
trash, he learned a lot about working in a kitchen. After finishing his high school diploma,
John went to culinary school. That’s where he learned how to bake pizza. Finally, he
worked as a commis at an Italian restaurant for some time to gain work experience.
3) Natural Resources
Natural resources describe all inputs into the production of goods and services that are
provided by nature. That means it represents everything that can be used to create
goods and services that is not humanmade. There are two types of natural resources:
renewable and non-renewable. As the name suggests, renewable resources (e.g.,
forests, solar power) can be replenished quickly. In contrast, non-renewable resources
(e.g., oil, minerals) usually take several thousands of years to be created.
Going back to our example, John uses an authentic wood-fired oven to bake his pizza.
Thus, he needs a lot of firewood. Fortunately for him, wood is a renewable natural
resource. Whenever a tree is cut down, a new tree can be planted in its place and grow
to the same size in a few years. By contrast, a gas-fired oven uses non-renewable
resources, because there is no way to replenish the gas (at least not for several
thousand years).
It is important to note that the occurrence of natural resources has a significant impact
on the distribution of wealth between economies and countries around the world.
Although natural resources are not strictly necessary for an economy to be highly
productive, they can be precious (e.g., oil) and bring great wealth and power to those
who own them.
4) Technological Knowledge
Technological knowledge refers to society’s understanding of the best ways to produce
goods and services. That means it describes technological progress within the economy.
Technological knowledge can be public or proprietary. Public knowledge is openly
available and can be used by all firms (e.g., computers). In contrast, proprietary
knowledge is a secret and only known to the company that discovers it (e.g., Coca-Cola
recipe).
In John’s case, the wood-fired oven he uses is an example of public technological
knowledge. It is commonly known that the best pizza must be baked in a wood-fired,
domed oven. By contrast, the secret recipe for John’s famous Garlic and Cheese Pizza
is only known to him and his employees. Thus, it’s considered proprietary technological
knowledge.
Please note that although technological knowledge and human capital are closely
related, it is essential to distinguish between the two. Technological knowledge refers to
society’s understanding of how the world works, whereas human capital describes the
transfer of this knowledge to the labor force.

Lesson 3: Factors of Production

An economic concept that refers to the inputs needed to produce goods and services
What are Factors of Production?
Factors of production is an economic concept that refers to the inputs needed to produce
goods and services. The factors are land, labor, capital, and entrepreneurship. The four
factors consist of resources required to create a good or service, which is measured by a
country’s gross domestic product (GDP).

In factors of production, the word “production” refers to a process of transforming inputs into
outputs, which are finished products that can be sold as a good or service. In order to do so,
the input will go through a production process and various stages to reach the hands of
consumers.
1. Land as a Factor of Production
 Land is a broad term that includes all the natural resources that can be found on land, such
as oil, gold, wood, water, and vegetation. Natural resources can be divided into renewable
and non-renewable resources.
 Renewable resources are resources that can be replenished, such as water,
vegetation, wind energy, and solar energy.
 Non-renewable resources consist of resources that can be depleted in supply, such as
oil, coal, and natural gas.
All resources, whether it is renewable or non-renewable, can be used as inputs in
production in order to produce a good or service. The income that comes from using land
and its natural resources is referred to as rent.
Besides using its natural resources, land can also be utilized for various purposes, such as
agriculture, residential housing, or commercial buildings. However, land differs from the
other factors of production because some natural resources are limited in quantity, so its
supply cannot be increased with demand.
2. Labor as a Factor of Production
Labor as a factor of production refers to the effort that individuals exert when they produce a
good or service. For example, an artist producing a painting or an author writing a book.
Labor itself includes all types of labor performed for an economic reward, such as mental
and physical exertion. The value of labor also depends on human capital, which is
determined by the individual’s skills, training, education, and productivity.
Productivity is measured by the amount of output someone can produce in each hour of
work. The income that comes from labor is referred to as wages. Note that work performed
by an individual purely for his/her personal interest is not considered to be labor in an
economic context.
The following are several characteristics of labor in terms of being a factor of production:
 First, labor is considered to be heterogeneous, which refers to the idea of how the
efficiency and quality of work are different for each person. It differs because it depends
on an individual’s unique skills, knowledge, motivation, work environment, and work
satisfaction.
 Additionally, labor is also perishable in nature, which means that labor cannot be
stored or saved up. If an employee does not work a shift today, the time that is lost today
cannot be recovered by working another day.
 Also, another characteristic of labor is that it is strongly associated with human
efforts. It means that there are factors that play an important role in labor, such as the
flexibility of work schedules, fair treatment of employees, and safe working conditions.
3. Capital as a Factor of Production
Capital, or capital goods, as a factor of production, refers to the money that is used to
purchase items that are used to produce goods and services. For example, a company that
 purchases a factory to produce goods or a truck that is purchased to do construction are
considered to be capital goods.
Other examples of capital goods include computers, machines, properties, equipment, and
commercial buildings. They are all considered to be capital goods because they are used in
a production process and contribute to the productivity of work. The income that comes from
capital is referred to as interest.
Below are several defining characteristics of capital as a factor of production:
 Capital is different from the first two factors because it is created by humans. For
example, capital goods like machines and equipment are created by individuals, unlike
land and natural resources.
 Additionally, capital is also a factor that can last a long time, but it depreciates in value
over time. For example, a building is a capital good that can endure for a long period of
time, but its value will diminish as the building gets older.
 Capital is also considered to be mobile because it can be transported to different
places, such as computers and other equipment.
4. Entrepreneurship as a Factor of Production
Entrepreneurship as a factor of production is a combination of the other three factors.
Entrepreneurs use land, labor, and capital in order to produce a good or service for
consumers.
Entrepreneurship is involved with establishing innovative ideas and putting that into action
by planning and organizing production. Entrepreneurs are important because they are the
ones taking the risk of the business and identifying potential opportunities. The income that
entrepreneurs earn is called profit.

Supplemental Reading
https://www.investopedia.com/ask/answers/040715/why-are-factors-production-
important-economic-growth.asp

Lesson 4. Policies And Productivity Growth

Check the link below.

https://openknowledge.worldbank.org/bitstream/handle/10986/34015/9781464816086.pdf
https://www.worldbank.org/en/research/publication/global-productivity
https://www.oecd-ilibrary.org/docserver/5jrp1f5rddtc-en.pdf?
expires=1654768923&id=id&accname=guest&checksum=6F3F26B8AD6C730A56EAABF0
5AC9E0FB

CHAPTER IV
THE MONETARY SYSTEM

Lesson 1. Money and its Functions in the Economy

Money is often defined in terms of the three functions or services that it provides.
Money serves as
 a medium of exchange,
 as a store of value,
 and as a unit of account.

Functions of Money:

1. Medium of exchange.

Money's most important function is as a medium of exchange to facilitate transactions.

Without money, all transactions would have to be conducted by barter, which involves
direct exchange of one good or service for another. The difficulty with a barter system is
that in order to obtain a particular good or service from a supplier, one has to possess a
good or service of equal value, which the supplier also desires. In other words, in a
barter system, exchange can take place only if there is a double coincidence of wants
between two transacting parties. The likelihood of a double coincidence of wants,
however, is small and makes the exchange of goods and services rather difficult. Money
effectively eliminates the double coincidence of wants problem by serving as a medium
of exchange that is accepted in all transactions, by all parties, regardless of whether they
desire each others' goods and services.

2. Store of value.

In order to be a medium of exchange, money must hold its value over time; that is, it
must be a store of value. If money could not be stored for some period of time and still
remain valuable in exchange, it would not solve the double coincidence of wants
problem and therefore would not be adopted as a medium of exchange. As a store of
value, money is not unique; many other stores of value exist, such as land, works of art,
and even baseball cards and stamps. Money may not even be the best store of value
because it depreciates with inflation. However, money is more liquid than most other
stores of value because as a medium of exchange, it is readily accepted everywhere.
Furthermore, money is an easily transported store of value that is available in a number
of convenient denominations.

3. Unit of account.
 Money also functions as a unit of account, providing a common measure of the value of
goods and services being exchanged. Knowing the value or price of a good, in terms of
money, enables both the supplier and the purchaser of the good to make decisions
about how much of the good to supply and how much of the good to purchase.

The Demand for Money

The demand for money

 is affected by several factors, including the level of income, interest rates, and inflation
as well as uncertainty about the future.
 The way in which these factors affect money demand is usually explained in terms of the
three motives for demanding money:
 the transactions,
 the precautionary, and
 the speculative motives.

Three Motives for demanding money:

1. Transactions motive. The transactions motive for demanding money arises from the
fact that most transactions involve an exchange of money. Because it is necessary to
have money available for transactions, money will be demanded. The total number of
transactions made in an economy tends to increase over time as income rises. Hence,
as income or GDP rises, the transactions demand for money also rises.

2. Precautionary motive. People often demand money as a precaution against an

uncertain future. Unexpected expenses, such as medical or car repair bills, often require
immediate payment. The need to have money available in such situations is referred to
as the precautionary motive for demanding money.

3. Speculative motive. Money, like other stores of value, is an asset. The demand for an
asset depends on both its rate of return and its opportunity cost. Typically, money
holdings provide no rate of return and often depreciate in value due to inflation. The
opportunity cost of holding money is the interest rate that can be earned by lending or
investing one's money holdings. The speculative motive for demanding money arises
in situations where holding money is perceived to be less risky than the alternative of
lending the money or investing it in some other asset.

For example, if a stock market crash seemed imminent, the speculative motive for demanding
money would come into play; those expecting the market to crash would sell their stocks and
hold the proceeds as money. The presence of a speculative motive for demanding money is
also affected by expectations of future interest rates and inflation. If interest rates are expected
to rise, the opportunity cost of holding money will become greater, which in turn diminishes the
speculative motive for demanding money. Similarly, expectations of higher inflation presage a
greater depreciation in the purchasing power of money and therefore lessen the speculative
motive for demanding money.
Lesson 2. The Role of Bangko Sentral in the Philippine Economy

The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the
Philippines. It was established on 3 July 1993 pursuant to the provisions of the 1987
Philippine Constitution and the New Central Bank Act of 1993. The BSP took over from
Central Bank of Philippines, which was established on 3 January 1949, as the country’s
central monetary authority. The BSP enjoys fiscal and administrative autonomy from the
National Government in the pursuit of its mandated responsibilities.
Mandates, Functions, and Responsibilities
Lesson 3. Banking System and Supply of Money

Supply of Money.

 M1 is narrowest and most commonly used. It includes all currency (notes and coins) in
circulation, all checkable deposits held at banks (bank money), and all traveler's
checks.
 A somewhat broader measure of the supply of money is M2, which includes all of M1
plus savings and time deposits held at banks. An even broader measure of the money
supply is M3, which includes all of M2 plus large denomination, long‐term time deposits
—for example, certificates of deposit (CDs) in amounts over $100,000. Most
discussions of the money supply, however, are in terms of the M1 definition of the
money supply.

Banking business. In order to understand the factors that determine the supply of money, one
must first understand the role of the banking sector in the money‐creation process.

Banks perform two crucial functions:

1. First, they receive funds from depositors and, in return, provide these depositors with
a checkable source of funds or with interest payments.
2. Second, they use the funds that they receive from depositors to make loans to
borrowers; that is, they serve as intermediaries in the borrowing and lending
process.

When banks receive deposits, they do not keep all of these deposits on hand because they
know that depositors will not demand all of these deposits at once. Instead, banks keep only a
fraction of the deposits that they receive. The deposits that banks keep on hand are known as
the banks' reserves. When depositors withdraw deposits, they are paid out of the banks'
reserves. The reserve requirement is the fraction of deposits set aside for withdrawal
purposes. The reserve requirement is determined by the nation's banking authority, a
government agency known as the central bank. Deposits that banks are not required to set
aside as reserves can be lent to borrowers, in the form of loans. Banks earn profits by
borrowing funds from depositors at zero or low rates of interest and using these funds to make
loans at higher rates of interest.

A balance sheet for a typical bank is given in Table . The balance sheet summarizes the bank's
assets and liabilities. Assets are valuable items that the bank owns and consist primarily of the
bank's reserves and loans. Liabilities are valuable items that the bank owes to others and
consist primarily of the bank's deposit liabilities to its depositors. In Table , the bank's assets
(reserves and loans) total $1 million. The bank's liabilities (deposits) total $1 million. A banking
firm's assets must always equal its liabilities.
You can infer from Table that the reserve requirement in this example is 10%.

How banks create money.

Consider what happens when the same bank receives a $100,000 deposit from one of
its depositors. The bank is required to set aside 10% of this deposit, or $10,000, as
reserves. It then lends out its excess reserves—in this case, the remaining $90,000 of
the initial deposit. Suppose, for the sake of simplicity, that all borrowers redeposit their
loans into the same bank. The bank thus receives $90,000 in new deposits of which it
sets $9,000 aside as reserves and lends out all of its excess reserves. Suppose again
that all borrowers redeposit their loans in the same bank, that the bank sets aside a
portion of these deposits, and that the bank then lends out the remainder, which is again
redeposited in the bank and so on and so on. This repeated chain of events is
summarized in Table .

If one were to follow this multiple deposit expansion process to its completion, the end
result would be that the bank's deposits would increase by $1 million, its loans would
increase by $900,000, and its reserves would increase by $100,000, all due to the initial
deposit of $100,000.
 Money multiplier. The amount by which bank deposits expand in response to an
increase in excess reserves is found through the use of the money multiplier, which is
given by the formula

In the example of deposit expansion found in Table , the reserve requirement is 10%; so,
the money multiplier in this case is (1/.10) = 10. The excess reserves resulting from the
initial deposit of $100,000 are $90,000. Multiplying $90,000 by the money multiplier, 10,
yields $900,000, which is the amount of additional deposits created by the banking
system as the result of the initial $100,000 deposit.

In reality, loan recipients do not deposit all of their loan funds into a bank. More typically,
they hold a fraction of their loan funds as currency. If some loan funds are held as
currency, then there is a leakage of money out of the banking system. In this case, the
money multiplier will still be greater than 1, but it will be less than the inverse of the
reserve requirement.

Central banking and the supply of money.

A portion of each nation's money supply ( M1) is controlled by a government agency

known as the central bank. The central bank is unique in that it is the only bank that can
issue currency. The U.S. central bank is called the Federal Reserve Bank but is
frequently referred to as “the Fed.” The Fed issues all U.S. dollar bills, known as Federal
Reserve Notes. Thus, the Fed has control over the supply of the U.S. currency. The
Fed also has control over the private bank reserves that banks entrust to the Fed.
Banks hold a portion of their required reserves with the Fed because the Fed acts as a
clearing house for all sorts of transactions between banks—for example, the
processing of all checks.

The Fed's liabilities therefore consist of all Federal Reserve Notes in circulation plus all
private bank deposits held at the Fed as reserves On the asset side, the Fed owns a
large amount of government debt in the form of U.S. government bonds. These bonds
have been issued by the U.S. Treasury to pay for current and past government deficits.
A simplified example of the Fed's balance sheet is provided in Table . Note that the
Fed's total liabilities are equal to its total assets.
The Fed's control over the money supply stems from its ability to change the composition of its
balance sheet. For example, the Fed may decide to purchase additional government bonds on
the open market from bondholders or private banks. This type of action is referred to as an
open market operation by the Fed. In exchange for these government bonds, the Fed
increases the reserves of private banks by the amount of the purchase. Banks, in turn, lend out
their excess reserves and initiate the multiple deposit expansion process discussed above.
Thus, when the Fed buys U.S. government bonds on the open market, it increases the supply of
money by increasing bank reserves and inducing an expansion in the amount of deposits.
Similarly, when the Fed sells some of its stock of U.S. government bonds to bondholders or
private banks, the Fed compensates itself for the sale by reducing the reserves of private banks.
The sale of government bonds by the Fed reduces the supply of money by reducing the
reserves available to private banks and thereby decreasing the amount of deposit expansion
that is possible.

The Fed can also control the supply of money by its choice of the reserve requirement. Recall
that the money multiplier is the reciprocal of the reserve requirement. If the Fed increases the
reserve requirement, the money multiplier decreases, implying that deposit creation and the
money supply are reduced. If the Fed decreases the reserve requirement, the money multiplier
increases, causing both the creation of deposits and the money supply to expand further.

Source: Cliff Notes, Money Supply

Supplemental Reading Material

https://tradingeconomics.com/philippines/money-supply-m2