Republic of the Philippines

MAILA ROSARIO COLLEGE

Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

COLLEGE OF BUSINESS ADMINISTRATION

MAJOR IN FINANCIAL MANAGEMENT
1st SEMESTER, S.Y. 2021 – 2022
MID-TERM COVERAGE

Module in
MONETARY POLICY AND CENTRAL BANKING

MODULE NO.: 04

NAME OF STUDENT: ___________________________________________________

YEAR / SECTION: ______________________________________________________
DATE RECEIVED: ______________________________________________________

INSTRUCTOR: ELEINE T. ALVAREZ

NOTE: Please be cautious in following the given instructions in each activity. Correspondingly, observe
punctuality in accomplishing this module. God bless and happy learning! – INSTRUCTOR
 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

I. OVERVIEW
This module focus is to develop the learner’s skills in understanding, analyzing,
evaluating and applying the concepts, underlying principles, and processes about the
Introduction to Investment.

II. LEARNING OBJECTIVES

In this learning module, the learner is expected to:
a. Illustrate how investment spending determines income.
b. Justify savings as a source of investment.
c. List and explain the determinants of savings.
d. Describe the global investment trends

III. GUIDE QUESTIONS

1.What does investment mean?
2. Is investment good in the economy?
3. How does one manage to overcome problems in case of risk in investment?

IV. LESSON PROPER

CONCEPT OF INVESTMENT?

Investment is the employment of funds with the aim of getting return on it. In general
terms, investment means the use of money in the hope of making more money. In
finance, investment means the purchase of a financial product or other item of value
with an expectation of favorable future returns.

Investment of hard-earned money is a crucial activity of every human being. Investment

is the commitment of funds which have been saved from current consumption with the
hope that some benefits will be received in future. Thus, it is a reward for waiting for
money. Savings of the people are invested in assets depending on their risk and return
demands.

Investment refers to the concept of deferred consumption, which involves purchasing an

asset, giving a loan or keeping funds in a bank account with the aim of generating future
returns. Various investment options are available, offering differing risk-reward

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 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

tradeoffs. An understanding of the core concepts and a thorough analysis of the options
can help an investor create a portfolio that maximizes returns while minimizing risk
exposure.

There are two concepts of Investment:

1. Economic Investment: The concept of economic investment means addition to
the capital stock of the society. The capital stock of the society is the goods
which are used in the production of other goods. The term investment implies the
formation of new and productive capital in the form of new construction and
producers durable instrument such as plant and
machinery. Inventories and human capital are also included in this concept.
Thus, an investment, in economic terms, means an increase in building,
equipment, and inventory.
2. Financial Investment: This is an allocation of monetary resources to assets that
are expected to yield some gain or return over a given period of time. It means
an exchange of financial claims such as shares and bonds, real estate, etc.
Financial investment involves contracts written on pieces of paper such
as shares and debentures. People invest their funds in shares, debentures, fixed
deposits, national saving certificates, life insurance policies, provident fund etc. in
their view investment is a commitment of funds to derive future income in the
form of interest, dividends, rent, premiums, pension benefits and the appreciation
of the value of their principal capital. In primitive economies most investments are
of the real variety whereas in a modern economy much investment is of the
financial variety.

The economic and financial concepts of investment are related to each other because
investment is a part of the savings of individuals which flow into the capital market either
directly or through institutions. Thus, investment decisions and financial decisions interact
with each other. Financial decisions are primarily concerned with the sources of
money where as investment decisions are traditionally concerned with uses or budgeting
of money.

ELEMENTS OF INVESTMENT
1. Return: Investors buy or sell financial instruments in order to earn return on
them. The return on investment is the reward to the investors. The return
includes both current income and capital gain or losses, which arises by the
increase or decrease of the security price.
2. Risk: Risk is the chance of loss due to variability of returns on an investment. In
case of every investment, there is a chance of loss. It may be loss of interest,
dividend or principal amount of investment. However, risk and return are
inseparable. Return is a precise statistical term and it is measurable. But the risk
is not precise statistical term. However, the risk can be quantified. The
investment process should be considered in terms of both risk and return.
3. Time: Time is an important factor in investment. It offers several different
courses of action. Time period depends on the attitude of the investor who
follows a ‘buy and hold’ policy. As time moves on, analysis believes that
conditions may change and investors may revaluate expected returns and risk for
each investment.
4. Liquidity: Liquidity is also important factor to be considered while making an
investment. Liquidity refers to the ability of an investment to be converted into
cash as and when required. The investor wants his money back any time.
Therefore, the investment should provide liquidity to the investor.
5. Tax Saving: The investors should get the benefit of tax exemption from the
investments. There are certain investments which provide tax exemption to the
investor. The tax saving investments increases the return on investment.

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 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

Therefore, the investors should also think of saving income tax and invest money
in order to maximize the return on investment.

INVESTMENT OBJECTIVES
Investing is a wide spread practice and many have made their fortunes in the process.
The starting point in this process is to determine the characteristics of the various
investments and then matching them with the individuals need and preferences. All
personal investing is designed in order to achieve certain objectives. These objectives
may be tangible such as buying a car, house etc. and intangible objectives such as
social status, security etc. similarly; these objectives may be classified as financial or
personal objectives. Financial objectives are safety, profitability, and liquidity. Personal
or individual objectives may be related to personal characteristics of individuals such as
family commitments, status, dependents, educational requirements, income,
consumption and provision for retirement etc.

The objectives can be classified on the basis of the investors approach as follows:
1. Short term high priority objectives: Investors have a high priority towards
achieving certain objectives in a short time. For example, a young couple will
give high priority to buy a house. Thus, investors will go for high priority
objectives and invest their money accordingly.
2. Long term high priority objectives: Some investors look forward and invest on
the basis of objectives of long-term needs. They want to achieve financial
independence in long period. For example, investing for post-retirement period or
education of a child etc. investors, usually prefer a diversified approach while
selecting different types of investments.
3. Low priority objectives: These objectives have low priority in investing. These
objectives are not painful. After investing in high priority assets, investors can
invest in these low priority assets. For example, provision for tour, domestic
appliances etc.
4. Money making objectives: Investors put their surplus money in these kinds of
investment. Their objective is to maximize wealth. Usually, the investors invest in
shares of companies which provide capital appreciation apart from regular
income from dividend. Every investor has common objectives with regard to the
investment of their capital.

The importance of each objective varies from investor to investor and depends upon the
age and the amount of capital they have. These objectives are broadly defined as
follows.

1. Lifestyle — Investors want to ensure that their assets can meet their financial
needs over their lifetimes.
2. Financial security — Investors want to protect their financial needs against
financial risks at all times.
3. Return — Investors want a balance of risk and return that is suitable to their
personal risk preferences.
4. Value for money — Investors want to minimize the costs of managing their
assets and their financial needs.
5. Peace of mind — Investors do not want to worry about the day-to-day
movements of markets and their present and future financial security.

Achieving the sum of these objectives depends very much on the investor having all
their assets and needs managed centrally, with portfolios planned to meet lifetime
needs, with one overall investment strategy ensuring that the disposition of assets will
match individual needs and risk preferences.

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 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

WHAT IS INVESTMENT MULTIPLIER?

The term investment multiplier refers to the concept that any increase in public or private
investment spending has a more than proportionate positive impact on aggregate income
and the general economy. It is rooted in the economic theories of John Maynard Keynes.

The multiplier attempted to quantify the additional effects of investment spending beyond
those immediately measurable. The larger an investment’s multiplier, the more efficient it
is in creating and distributing wealth throughout the economy.

The theory of multiplier occupies an important place in the modern theory of income and
employment.

The concept of multiplier was first of all developed by F.A. Kahn in the early 1930s. But
Keynes later further refined it. F.A. Kahn developed the concept of multiplier with
reference to the increase in employment, direct as well as indirect, as a result of initial
increase in investment and employment.

Keynes, however, propounded the concept of multiplier with reference to the increase in
total income, direct as well as indirect, as a result of original increase in investment and
income.

Therefore, whereas Kahn’s multiplier is known as ’employment multiplier’, Keynes’

multiplier is known as investment or income multiplier. The essence of multiplier is that
total increase in income, output or employment is manifold the original increase in
investment.

For example, if investment equal to P100 is made, then the income will not rise by P100
only but a multiple of it.

If as a result of the investment of P100, the national income increases by P300, multiplier
is equal to 3. If as a result of investment of P100, total national income increases by P400,
multiplier is 4. The multiplier is, therefore, the ratio of increment in income to the increment
in investment. If ∆I stand for increment in investment and ∆Y stands for the resultant
increase in income, then multiplier is equal to the ratio of increment in income (∆K) to the
increment in investment (∆I).

Therefore k = ∆Y/∆I where k stands for multiplier.

Now, the question is why the increase in income is many times more than the initial
increase in investment. It is easy to explain this. Suppose Government undertakes
investment expenditure equal to P100 on some public works, say, the construction of rural
roads. For this Government will pay wages to the laborer engaged, prices for the materials
to the suppliers and remunerations to other factors who make contribution to the work of
road-building.

The total cost will amount to P100. This will increase incomes of the people equal to P100.
But this is not all. The people who receive P100 will spend a good part of them on
consumer goods. Suppose marginal propensity to consume of the people is 4/5 or 80%.
Then out of P100 they will spend P80 on consumer goods, which would increase incomes
of those people who supply consumer goods equal to P80. But those who receive these
P80 will also in turn spend these incomes, depending upon their marginal propensity to
consume. If their marginal propensity to consume is also 4/5, then they will spend P64 on
consumer goods. Thus, this will further increase incomes of some other people equal to
P64.

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 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

In this way, the chain of consumption expenditure would continue and the income of the
people will go on increasing. But every additional increase in income will be progressively
less since a part of the income received will be saved. Thus, we see that the income will
not increase by only P100, which was initially invested in the construction of roads, but
by many times more.

Example:

It is thus clear that if the marginal propensity to consume is 4/5, the investment of P100
lead to the increase in the national income by P500. Therefore, multiplier here is equal to
5. We can express this in a general formula.

If ∆Y stands for increase in income, ∆l stands for increase in investment and MPC for
marginal propensity to consume, we can write the equation (i) above as follows:

It is clear from above that the size of multiplier depends upon the marginal propensity to
consume of the community. The multiplier is the reciprocal of one minus marginal
propensity to consume. However, we can express multiplier in a simpler form. As we know
that saving is equal to income minus consumption, one minus marginal propensity to
consume will be equal to marginal propensity to save, that is, 1 – MPC = MPS. Therefore,
multiplier is equal to 1/ 1- MPC =1/MPC.

ALGEBRAIC DERIVATION OF MULTIPLIER:

The multiplier can be derived algebraically as follows:
Writing the equation for the equilibrium level of income we have

Y = C + I … (1)

As in the multiplier analysis we are concerned with changes in income induced by

changes in investment, rewriting the equation (1) in terms of changes in the variables we
have

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 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

∆Y = ∆C + ∆I … (2)

In the simple Keynesian model of income determination, change in investment is

considered to be autonomous or independent of changes in income while changes in
consumption are function of changes in income.
In the consumption function,
C = a + bY

where a is a constant term, b is marginal propensity to consume which is also assumed

to remain constant. Therefore, change in consumption can occur only if there is change
in income. Thus

This is the same formula of multiplier as obtained earlier. Note that the value of multiplier
∆Y/∆I will remain constant as long as marginal propensity to consume remains the same.

DETERMINANTS OF SAVING
Every individual will want to save some part of the income in the view of solving the
possible problems that may occur in the future. But remain determinant of saving is the
level of income of the consumer. Therefore, the higher the level of income of the people,
the higher is the saving possibility. So, part of the income left over after the
consumption expenditure of people is known as saving. Factors determining saving can
be explained as follows:

1. Level of income
The saving of every individual depends upon the level of income. The higher the
level of income, the higher is the saving. This is because the marginal propensity
to consume of rich people with high income will be low while
the marginal propensity to consume of poor people with low income will be high.
For this reason, the developing countries with low level of income will have
lower marginal propensity to save.
2. Precaution
If people take precautions to tackle the economic problems that may arise in the
future, then the current saving will increase. In such a situation, the propensity to
consume will decrease.
3. Foresightedness
Some people save for their old-age, for their children’s health and education, for
the security of their family etc. this will increase in the saving.
4. Liquid assets

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 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

Among various determinants of saving, liquid asset is also a main one. The more
the people desire to keep liquid assets, the less will be the saving. This is
because liquid assets get spent on various unexpected activities. Just opposite to
this, saving will be high if liquid asset with people is less.
5. Fiscal policy
Fiscal policy undertaken by the government also determines the saving. If the
government increases the tax rate, then propensity to save will decrease. But
contrary to this, if tax rate is decreased, then the propensity to save of the people
will increase.
6. Price level
The price level of the goods in the market also influences the saving. The higher
the market price, the less will be the saving of the consumers resulting the
decrease in the national saving. But if the market price level is low, the consumers
can get goods cheaper and increase the saving. So, the price level of the goods
also determines the saving.

THE DETERMINANTS OF INVESTMENT

The level of investment in an economy tends to vary by a greater extent than other
components of aggregate demand. This is because the underlying determinants also
have a tendency to change.

The main determinants of investment are:

a. The expected return on the investment

Investment is a sacrifice, which involves taking risks. This means that businesses,
entrepreneurs, and capital owners will require a return on their investment in order
to cover this risk and earn a reward. In terms of the whole economy, the amount
of business profits is a good indication of the potential reward for investment.

b. Business confidence
Similarly, changes in business confidence can have a considerable influence on
investment decisions. Uncertainty about the future can reduce confidence and
means that firms may postpone their investment decisions until confidence returns.

c. Changes in national income

Changes in national income create an accelerator effect. Economic theory
suggests that, at the macro-economic level, small changes in national income can
trigger much larger changes in investment levels.

d. Interest rates
Investment is inversely related to interest rates, which are the cost of borrowing and
the reward to lending. Investment is inversely related to interest rates for two main
reasons.
1. Firstly, if interest rates rise, the opportunity cost of investment rises. This means
that a rise in interest rates increases the return on funds deposited in an interest-
bearing account, or from making a loan, which reduces the attractiveness of
investment relative to lending. Hence, investment decisions may be postponed
until interest rates return to lower levels.
2. Secondly, if interest rates rise, firms may anticipate that consumers will reduce
their spending, and the benefit of investing will be lost. Investing to expand requires
that consumers at least maintain their current spending. Therefore, a predicted fall

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 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

is likely to discourage firms from investing and force them to postpone their
investment decisions.

e. General expectations
Because investment is a high-risk activity, general expectations about the future
will influence a firm’s investment appraisal and eventual decision-making. Any
indication of a downturn in the economy, a possible change of government, war or
a rise in oil or other commodity prices may reduce the expected benefit or increase
the expected cost of investment.

f. Corporation tax
Firms pay corporation tax on their profits, so a reduction in tax increases the
profits they retain after tax is paid, and this acts as an incentive to invest. There
current rate of 20% will fall to 19% in 2017, and then to 18% in 2020.

g. The level of savings

Household and corporate savings provides a flow of funds into the financial
sector, which means that funds are available for investment. Increased saving may
reduce interest rates and stimulate corporate borrowing and investment.

h. The accelerator effects

Small changes in household income and spending can trigger much larger
changes in investment. This is because firms often expect new sales and orders to
be sustained into the long run and purchase larger quantities of capital goods than
they need in the short run.

In addition, machinery is generally indivisible which means it cannot be broken into

small amounts and bought separately. Even small increases in demand can trigger
the need to buy completely new machines or build entirely new factories and
premises, even though the increase in demand may be relatively small.

The combined effect of these two principles creates what is called the accelerator
effect. For example, if in a given year national income rises by P20b, and
investment rises by P40b, the value of the accelerator is 2.

V. EVALUATION

Problem Solving:
Suppose I = P70; C = Rs. 60 + 0.80 Y.
(a) Find the equilibrium level of income
(b) Find the equilibrium level of income when there is a P10 increases in autonomous
planned investment (planned investment increases from P70 to P80)
(c) Establish the multiplier effect of the P10 increase in autonomous spending.

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 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

VI. REFERENCE/S
- Texbook
❖ Cristobal M. Pagoso, 2014, Money, Credit and Banking, 856 Nicanor Reyes, Sr.
St., Sampaloc, Manila, Rex Book Store, Inc.
❖ Feliciano R. Fajardo, Manuel M. Manansala, 2008, Money, Credit and Banking,
Quad Alpha Centrum Bldg. 125 Pioneer Street Mandaluyong City 1550, National
Book Store, Inc.

- Online resources
❖ Introduction to Investing | Investor.gov
❖ Introduction to Investments - Meaning, Objectives and Elements - MBA
Knowledge Base (mbaknol.com)
❖ Keynes' Theory of Investment Multiplier (With Diagram)
(economicsdiscussion.net)
❖ Investment Multiplier and its Mechanism (byjus.com)
❖ Investment Multiplier Definition (investopedia.com)
❖ Investment Multiplier: Definition, Logic and Assumptions
(economicsdiscussion.net)

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 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

❖ Savings: 9 Vital Determinants of Savings in an Economy (yourarticlelibrary.com)

❖ world of economic: Determinants of saving
❖ 29.2 Determinants of Investment – Principles of Economics (umn.edu)
❖ Investment - determinants of investment | Economics Online | Economics Online

COMPILED BY: CHECKED BY:

ELEINE T. ALVAREZ ____________________

BA Instructor BSBA Dean / Coordinator

General Education Coordinator

APPROVED BY:

ROMEO M. PASCUA, Ph.D.

Vice-President of Academic Affairs

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