Monetary Policy and Central Banking Midterm Exam

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Questions and Answers

What is the primary goal of monetary policy?

To control inflation and stabilize currency

What is the role of money supply indicators in monetary policy?

To predict future behavior of prices and assess economic activity

What are the tools used by the central bank to control the money supply?

The cost of money and the rate of interest

What is the purpose of increasing money supply according to the text?

To stimulate the economy Signup and view all the answers

What is the purpose of decreasing money supply according to the text?

To control a possible mishap in the economy Signup and view all the answers

What is the role of the Bangko Sentral ng Pilipinas (BSP) in the Philippines?

To manage the money supply and control inflation Signup and view all the answers

What is the primary objective of the Bangko Sentral ng Pilipinas' monetary policy?

To promote price stability Signup and view all the answers

What is the main responsibility of the Bangko Sentral ng Pilipinas as the central bank of the Philippines?

To provide policy directions in the areas of money, banking, and credit Signup and view all the answers

When was the Bangko Sentral ng Pilipinas established?

July 3, 1993 Signup and view all the answers

What are the two extreme scenarios that the BSP tries to prevent through its monetary policy?

High inflation and high unemployment Signup and view all the answers

What is the BSP's role in influencing the economy?

It has the sole ability to influence the amount of money circulating in the economy Signup and view all the answers

What are the other economic goals that the BSP considers in its policy decision-making, aside from price stability?

Promoting financial stability and achieving broad-based, sustainable economic growth Signup and view all the answers

What are the different types of indicators used to measure the money supply?

M1, M2, M3, and M4 Signup and view all the answers

What is included in the calculation of M1, also known as Narrow Money?

Currency in circulation, cash in the hands of the public, peso demand deposits, tourists' checks, and other checkable deposits Signup and view all the answers

What is the difference between M1 and M2?

M2 includes all of M1 plus peso saving deposits, time deposits, and balances in retail money market mutual funds Signup and view all the answers

What is included in the calculation of M3, also known as Broad Money Liabilities?

M2 plus money substitutes such as promissory notes and commercial papers Signup and view all the answers

What does a low velocity of M1 and M2 money stock indicate?

That there is a lot of money in the hands of consumers and it is not changing hands frequently Signup and view all the answers

What is included in the calculation of M4, also known as Liquidity Money?

M3 plus transferable deposits, treasury bills, and deposits held in foreign currency Signup and view all the answers

What is the purpose of the rediscounting facility provided by the BSP?

To help banks meet temporary liquidity needs by refinancing the loans they extend to their clients Signup and view all the answers

What are the two types of rediscounting facilities offered by the BSP?

Peso rediscounting facility and the Exporter’s dollar and Yen Rediscount Facility Signup and view all the answers

What is the main reason why banks need to maintain a certain balance of money, known as reserves?

To meet temporary liquidity needs and ensure financial stability Signup and view all the answers

What are the two forms of reserve requirements mentioned in the text?

Regular or Statutory Reserves and Liquidity Reserve Signup and view all the answers

What is the impact of changes in reserve requirements on the monetary supply?

Changes in reserve requirements will result in significant changes in the monetary supply Signup and view all the answers

What are the indicators used by the BSP to measure the money supply?

M1, M2, M3, and M4 Signup and view all the answers

What is the key difference between outright transactions and repurchase or reverse repurchase transactions?

There is no clear intent by the government to reverse the action of selling/buying monetary securities. Signup and view all the answers

What happens when the BSP buys securities?

It pays for them by directly crediting its counterparty's Demand Deposit Account with the BSP. Signup and view all the answers

What is a foreign exchange swap?

The actual exchange of two currencies at a specific date, at a rate agreed upon on the deal date, and the reverse exchange of the currencies at a farther date in the future, also at an interest rate agreed on deal date. Signup and view all the answers

What was introduced by the Bangko Sentral in 1998 to expand its liquidity management?

The acceptance of fixed-term deposits. Signup and view all the answers

What is the purpose of the Special Deposits Account (SDA)?

To hold fixed-term deposits by banks and institutions affiliated with the BSP. Signup and view all the answers

What is the purpose of the Bangko Sentral's standing facilities?

To increase the volume of credit in the financial system. Signup and view all the answers

Study Notes

Bangko Sentral ng Pilipinas (BSP)

Established on July 3, 1993, under the 1987 Philippine Constitution and the New Central Bank Act of 1993.
Acts as the central monetary authority of the Philippines, overseeing banks and non-bank financial institutions.
Aims to stabilize price levels, manage inflation, and minimize unemployment through monetary policy.

Objectives of Monetary Policy

The primary goal is to promote price stability, influencing the money supply circulation in the economy.
Secondary objectives include achieving financial stability and sustainable economic growth.

Money Supply Indicators

M1 (Narrow Money): Includes cash in circulation, demand deposits, and travelers' checks; represents funds immediately available for spending.
M2 (Broad Money): Includes M1 plus savings deposits, time deposits, and retail money market mutual fund balances; reflects broader financial assets.
M3 (Broad Money Liabilities): Incorporates M2 alongside money substitutes like promissory notes and commercial papers.
M4 (Liquidity Money): Comprises M3 and additional liquid assets like treasury bills and foreign currency deposits.

Monetary Transactions

Outright Transactions: Permanent buying/selling of monetary securities by the BSP, affecting the money supply directly.
Foreign Exchange Swap: Exchange of currencies at agreed-upon rates, with subsequent reverse exchanges at a future date.

Liquidity Management Tools

Acceptance of Fixed-Term Deposits: Introduced in 1998 to enhance liquidity management via Special Deposits Account (SDA).
Standing Facilities: BSP extends loans and credit to banks to enhance credit volume in the financial system.

Monetary Policy Processes

Monitoring and controlling the money supply to manage inflation and stabilize the economy.
Indicators like M1, M2, M3, and M4 provide insights into future price behavior and economic activity.
Government actions may involve increasing money supply for economic stimulation or decreasing it to curb inflation.

Rediscounting Facilities

A credit facility enabling banks to meet temporary liquidity needs by refinancing client loans.
Types include peso rediscounting and Exporter’s dollar and Yen Rediscount Facility.

Reserve Requirements

Regulations determine the minimum reserves banks must hold, influencing lending capacity and money supply.
Two forms include Regular Statutory Reserves and Liquidity Reserve.

BSP's Role

The BSP utilizes various tools to manage the money supply and maintain economic stability effectively.
Through open market operations, reserve requirements, rediscounting, and liquidity measures, it contributes to financial stability in the Philippines.

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Description

This quiz covers the topics of monetary policy and central banking, with a focus on the Bangko Sentral ng Pilipinas (BSP), the central bank of the Philippines, and its tools to alter money supply. It's a comprehensive midterm exam that tests your knowledge of the BSP's role and functions. Prepare to answer questions on the BSP's history, monetary policy tools, and more.