Contractionary Monetary Policy
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Questions and Answers

Which of the following best describes money?

  • A medium of exchange and means of payment
  • A storehouse of purchasing power
  • A standard of value
  • All of the above (correct)

    • In primitive societies, what can be considered as money?

  • Physical and mental efforts
  • Checks and credit lines
  • Beads, salt, and shells (correct)
  • Coins and bills

    • What supports our modern incarnation of business?

  • Government authority
  • Credit lines
  • Physical currency
  • Trust and confidence (correct)

    • What happens to economic activity when the supply of money increases?

    <p>Economic activity increases</p> Signup and view all the answers

    What is the relationship between money supply and economic stability?

    <p>Money supply is directly related to economic stability</p> Signup and view all the answers

    What happens to economic activity when funds are withdrawn from circulation?

    <p>Economic activity decreases</p> Signup and view all the answers

    What does money supply refer to?

    <p>The circulation of money used for purchasing goods and services</p> Signup and view all the answers

    Which of the following is a measure of the total money supply in the Philippines?

    <p>M1</p> Signup and view all the answers

    What does M2 include in addition to M1?

    <p>Peso savings and time deposits</p> Signup and view all the answers

    What does M3 include in addition to M2?

    <p>Transferable and other deposits in foreign currency</p> Signup and view all the answers

    What does M4 include in addition to M3?

    <p>Transferable and other deposits in foreign currency</p> Signup and view all the answers

    What is the primary objective of the Bangko Sentral ng Pilipinas (BSP)?

    <p>Maintain price stability conducive to a balanced and sustainable growth of the economy and employment</p> Signup and view all the answers

    Which core function of the BSP involves managing systemic risks and promoting a secure and reliable banking system?

    <p>Financial stability</p> Signup and view all the answers

    What is the function of monetary policy?

    <p>To control the flow of money in the market</p> Signup and view all the answers

    Which action does the BSP take when there is 'too much money' in the economy supporting overall demand for goods and services?

    <p>The BSP tightens the faucet to reduce the money supply.</p> Signup and view all the answers

    What is the primary objective of the BSP's monetary policy?

    <p>To maintain long-run price stability.</p> Signup and view all the answers

    What is financial stability?

    <p>Managing financial system risks to prevent negative consequences to the economy.</p> Signup and view all the answers

    Why is financial stability important for individuals?

    <p>All of the above.</p> Signup and view all the answers

    What is the BSP's objective in promoting financial stability?

    <p>All of the above.</p> Signup and view all the answers

    What is the difference between systemic risk and systematic risk?

    <p>Systemic risk affects the entire financial system, while systematic risk affects a specific company or asset.</p> Signup and view all the answers

    What does the BSP do when there is 'too little money' in the economy dampening overall demand for goods and services?

    <p>The BSP loosens the faucet to expand the money supply.</p> Signup and view all the answers

    Which of the following is NOT a factor that can contribute to overall risk in the financial system?

    <p>Technological advancements</p> Signup and view all the answers

    What is the main objective of the BSP in terms of monetary policy?

    <p>To maintain price stability</p> Signup and view all the answers

    What is the role of the BSP in promoting an efficient payments and settlements system?

    <p>Overseer, regulator, and supervisor of payment systems</p> Signup and view all the answers

    What is the purpose of the National Retail Payment System (NRPS)?

    <p>To establish safe and efficient retail payment system</p> Signup and view all the answers

    What is the function of the PhilPaSS?

    <p>To provide infrastructure for real-time gross settlement</p> Signup and view all the answers

    Who directly benefits from the BSP's objective of maintaining price stability?

    <p>Consumers</p> Signup and view all the answers

    What is the BSP's role in ensuring the safe and sound operation of banks and other BSFIs?

    <p>Overseer, regulator, and supervisor of payment systems</p> Signup and view all the answers

    What is the benefit of having an efficient payments and settlements system?

    <p>All of the above</p> Signup and view all the answers

    What is the lone Peso RTGS system in the Philippines?

    <p>PhilPaSS</p> Signup and view all the answers

    Study Notes

    Money and Banking System

    • In primitive societies, commodities like gold, salt, and livestock can be considered as money.
    • Money supply refers to the total amount of money circulating in the economy.

    Measures of Money Supply

    • M1 includes coins, bills, and checkable deposits.
    • M2 includes M1 plus savings deposits, money market funds, and repurchase agreements.
    • M3 includes M2 plus large time deposits, institutional money market funds, and certificates of deposit.
    • M4 includes M3 plus other liquid assets.

    Central Banking

    • The primary objective of the Bangko Sentral ng Pilipinas (BSP) is to maintain price stability.
    • The BSP's core function involves managing systemic risks and promoting a secure and reliable banking system.
    • The function of monetary policy is to control the money supply to promote economic growth and stability.
    • When there is 'too much money' in the economy, the BSP takes contractionary measures to reduce the money supply.
    • When there is 'too little money' in the economy, the BSP takes expansionary measures to increase the money supply.

    Financial Stability

    • Financial stability is the ability of the financial system to withstand shocks and maintain its functions.
    • Financial stability is important for individuals because it ensures that they can access financial services and achieve their financial goals.
    • The BSP's objective in promoting financial stability is to maintain a stable and efficient financial system.

    Risks and Payments Systems

    • Systemic risk refers to the risk of collapse of the entire financial system, while systematic risk refers to the risk of a specific sector or institution.
    • The BSP promotes an efficient payments and settlements system to facilitate the exchange of goods and services.
    • The National Retail Payment System (NRPS) is a system that enables the electronic transfer of funds.
    • The PhilPaSS is a system that facilitates the exchange of high-value transactions.
    • The lone Peso RTGS system in the Philippines is a system that enables the real-time transfer of funds.
    • The benefit of having an efficient payments and settlements system is that it increases the speed and efficiency of transactions.
    • The BSP ensures the safe and sound operation of banks and other BSP-supervised financial institutions (BSFIs).

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    Description

    Test your knowledge of contractionary monetary policy and its effects on the economy. Learn about the measures taken by the central bank to reduce inflationary pressures and dampen overall demand. Explore the impact of higher interest rates, increased borrowing costs, and reduced lending on the money supply and economic growth.

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