Monetary Policy and Money Supply Quiz

Questions and Answers

What effect do increases in the money supply have on short-term interest rates?

Push them up, encouraging investments and consumptions

What is one of the functions of the BSP as mentioned in the text?

Printing money bills and minting money coins

In the long run, what is the likely outcome of an abundance of money supply?

Increase in prices

What role does the BSP play for government agencies according to the text?

Handling banking accounts and providing foreign exchange Signup and view all the answers

Why do banks need to maintain reserves with the BSP as per the text?

To ensure availability of cash for depositors Signup and view all the answers

When the BSP sells securities, what is the impact on money supply according to the text?

Money supply increases Signup and view all the answers

What is one of the purposes of maintaining international currency reserves by central banks as discussed in the text?

To guarantee currency issuance and balance of payments Signup and view all the answers

What does the rediscounting function of the central bank involve?

Lending money to banks in distress based on promissory notes Signup and view all the answers

How does the central bank act as a clearing house?

Banks send representatives to settle claims against each other Signup and view all the answers

What is the main goal of expansionary monetary policy?

Increasing the money supply Signup and view all the answers

What is one of the methods the central bank can use to control credit?

Imposing ceilings on total amounts banks can lend Signup and view all the answers

Which action by the central bank would be part of expansionary monetary policy?

Lowering the government discount rate Signup and view all the answers

How does monetary policy impact investment and consumption?

Increase in interest rates encourages investment and consumption Signup and view all the answers

What does BSP stand for in the context of this text?

Bangko Sentral ng Pilipinas Signup and view all the answers

Which objective is NOT listed as an objective of the BSP in the text?

Providing payment services to foreign companies Signup and view all the answers

Study Notes

BSP: Central bank of the Philippines, plays a crucial role in coordinating with the government and private sectors in nation building
Functions of BSP:
- Bank of issue: Monopoly of printing money bills and minting coins
- Government’s banker, agent, and adviser: Handles banking accounts of government agencies, provides foreign exchange for imports and loans
- Custodian of cash reserves: Regulates banks to maintain adequate reserves to ensure cash availability
- Custodian of international currency reserves: Maintains reserves as a guarantee for currency issuance and deposit liabilities
- Bank of rediscount and lender of last resort: Lends money to banks in distress
- Bank of central clearance and settlement: Acts as a clearing house for inter-bank claims
- Controller of credit: Controls money supply by controlling credit
Monetary Policy: BSP role in managing money supply to individuals and businesses
Expansionary Monetary Policy: Increases money supply
- Central bank can buy securities, lower discount rate, or lower reserve requirements
Contractionary Monetary Policy: Decreases money supply
- Central bank can sell securities, raise discount rate, or raise reserve requirements
Objectives of the BSP:
- Promote balanced and sustainable economic growth
- Maintain price stability
- Maintain monetary stability and peso convertibility
- Maintain stability of financial system
- Provide payment and financial services
- Supervise and regulate depository institutions
Incorrect statements:
- Short-term interest rates are pushed up by increases in the money supply (False)
- Abundance of money supply leads to decrease in prices (False)
- BSP can lower interest rates to stimulate investment and consumption in the short run (True, but not the only way)
- Central bank increases money supply by selling securities (False)
- Increasing reserve requirements reduces the amount available for banks to lend to borrowers (True)