Monetary Policy - Meeting 3 9G

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1.Define financial sector, financial institutions, and monetary policy.
2.Explain the role of financial institutions in the economy.
3.Enumerate the components of money supply in the economy.
4.Enumerate the monetary instruments that the Bangko Sentral ng

Pilipinas uses to regulate the money supply in the economy.

5.Explain when the Bangko Sentral ng Pilipinas implements a

contractionary monetary policy and when it implements an
expansionary monetary policy.

6.Explain why having too little and too much money supply is

harmful to the economy.

1.Define financial sector, financial institutions, and monetary policy.
2.Explain the role of financial institutions in the economy.
3.Enumerate the components of money supply in the economy.
4.Enumerate the monetary instruments that the Bangko Sentral ng

Pilipinas uses to regulate the money supply in the economy.

5.Explain when the Bangko Sentral ng Pilipinas implements a

contractionary monetary policy and when it implements an
expansionary monetary policy.

6.Explain why having too little and too much money supply is

harmful to the economy.

Three instruments of monetary policy:
1. reserve requirements
❖ are the portions of deposits that banks must maintain in

their vaults.

2. the discount rate
❖ the interest rate charged by Central Banks to depository

institutions on short-term loans.

3. open market operations
❖ involve the buying and selling of government securities.

Bank

Series of Deposits

Amount Deposited

Reserve Requirement

Bank A

Initial Deposit

PhP 1,000,000.00

PhP 100,000.00

Bank B

Second Deposit

900,000.00

90,000.00

Bank C

Third Deposit

810,000.00

81,000.00

Bank D

Fourth Deposit

729,000.00

72,900.00

Bank E

Fifth Deposit

656,100.00

65.610.00

Bank F

Sixth Deposit

590,490.00

59,490.00

Bank G

Seventh Deposit

531,441.00

53,441.00

Bank H

Eighth Deposit

478,296.90

47,829.60

Bank I

Ninth Deposit

430,467.21

43,046.72

Bank J

Tenth Deposit

387,420.49

38.742.05

Bank K

Eleventh Deposit

348,678.44

34,867.84

And so on and so forth

All Banks

Final Deposit

PhP 10,000,000

Money Creation Process via the Limited Reserve Requirement System (10%)

Bank

Series of
Deposits

Amount

Deposited

Reserve

Requirement

Bank A

Initial Deposit

PhP 1,000,000.00

PhP 200,000.00

Bank B

Second Deposit

800,000.00

160,000.00

Bank C

Third Deposit

640,000.00

128,000.00

Bank D

Fourth Deposit

512,000.00

102,400.00

Bank E

Fifth Deposit

409,600.00

81,920.00

Bank F

Sixth Deposit

327,680.00

65,536.00

Bank G

Seventh Deposit

262,144.00

52,428.80

And so on and so

forth

All Banks

Final Deposit

PhP 5,000,000

Money Creation Process

via the Limited Reserve Requirement System (20%)

•

Lower bank’s % of required reserve results to
a higher the deposit multiplier and more
money the banks can lend out to borrowers.

NOTE:

% of Reserve Requirement;

Deposit Multiplier; &

Money Supply

•

Higher bank’s % of required reserve results to
a lower deposit multiplier and less money
that bank can lend out to borrowers .

Note:

% of Reserve Requirement;

Deposit Multiplier;

Money
Created

At 5% Discount Rate

Name of

Lending/Creditor

Bank

Loaned Amount to a

Borrower

Loan extended by
the Central Bank at
5% Discount Rate

Magaling Bank

1st LoanPhP 900,000.000

PhP 855,000.00

2nd LoanPhp 855,000.00

Php 812,250.00

3rd Loan PhP 812,250.00

Php 771,637.50

And so on and so forth

Money Creation Process through

the Central Bank’s Rediscounting Window

At 10% Discount Rate

Name of

Lending/Creditor

Bank

Loaned Amount to a

Borrower

Loan extended by
the Central Bank at
10% Discount rate

Magaling Bank

1st LoanPhP 900,000.000

PhP 810,000.00

2nd LoanPhp 810,000.00

Php 729,000.00

3rd Loan PhP 729,000.00

Php 656,100.00

And so on and so forth

Money Creation Process through

the Central Bank’s Rediscounting Window

Three instruments of monetary policy:
1. reserve requirements
❖ are the portions of deposits that banks must maintain in

their vaults.

2. the discount rate
❖ the interest rate charged by Central Banks to depository

institutions on short-term loans.

3. open market operations
❖ involve the buying and selling of government

securities.

What is a government
bond?

Government bond is an
agreement between the
seller—a government—and
investors who effectively act
as lenders by agreeing to buy
the bonds. In exchange for
lending a government money,
investors receive regular
interest payments.

Maturity Period

Interest Rate

10 years

6.252%

5 years

5.937%

2 years

5.859%

1 year

5.697%

3 months

4.677%

Philippine Government Bonds Yield

As of March 14, 2023

Philippines Government Bonds -Yields Curve (worldgovernmentbonds.com)

Central banks use bonds to regulate a country’s money
supply. They sell bonds to decrease the cash circulating in the
economy and to rein in inflation.

Conversely, central banks buy bonds to inject the economy
with more cash and to stimulate its growth. The US Federal
Bank did this after the financial crisis of 2007-09 and during
the COVID-19 pandemic.

How does selling or buying government bonds/securities
in the open market help regulate money supply in the
economy?

Philippines Sells $2.35 Billion of Bonds as It Fights
Pandemic
•Sovereign raised funds in a two-tranche dollar- bond
offering
•Emerging nations are selling record amount of foreign
debt

Philippines Sells $2.35 Billion of Bonds as It Fights
Pandemic - Bloomberg

Also, governments sell bonds to raise much-needed funds.

The BSP Functions:

• Liquidity Management

(management of the monetary system)

• Currency Issue

(producer and issuer of coins and peso bills)

• Financial Supervision

(supervision of banks and other financial
institutions)

• Management of Foreign Exchange Reserves

(depository of foreign currencies)

• Determination of Exchange Rate Policy

(sets the exchange rate of the peso vis a vis other
currencies)

• Financial Advisor and Depository of the Gov’t.

(advises the government on money
matters and keeps the funds of the gov’t.)

• Lender of Last Resort

(extends loans to banks)

The BSP is
the
country’s
bank of all
banks and
monetary
authority

Monetary policy is the faucet that the BSP maneuvers to regulate
the flow of money supply in the country based on the economy’s
needs.

Monetary policy can be
broadly classified as
either contractionary or
expansionary .

Contractionary monetary policy
• limits the amount of active money

circulating in the economy.

• driven by increases in the various base

interest rates controlled by central banks.

• goal is to reduce inflation.
• also termed tight money policy

Expansionary monetary policy
• works by increasing money supply in

the economy

• driven by low interest rates
• goal is to revitalize/stimulate the

economy and beat deflation/recession

• also termed easy money policy.

Monetary

Tools

Contractionary Policy

(Tight Money)

Expansionary Policy

(Easy Money)

Reserve
Requirement Rate

1.

4.

Discount Rates /
Interest Rates

2.

5.

Open Market
Operations

3.

6.

Maneuvering Monetary Policy

Multiple Choice

1. Low percentage of reserve requirement creates less money in the banking system and it is consistent with contractionary monetary policy.

• True

• False

Multiple Choice

2. High BSP discount rate limits the capacity of banks to create more money and it is consistent with tight money policy.

• True

• False

Multiple Choice

3. Selling more government bonds supports the BSP's implementation of contractionary monetary policy.

• True

• False

Multiple Choice

4. High percentage of reserve requirement limits the banks' capacity to create to extend loans and it supports the BSP's contractionary mone policy.

• True

• False

Multiple Choice

5. The banks' capacity to offer more loans gets enhanced when the BSP increases its discount rate and it is consistent with easy money policy.

• True

• False

Multiple Choice

6. Buying back or redeeming the government bonds sold in the open market helps increase the currency in circulation and it is consistent with expansionary monetary policy.

• True

• False

Monetary

Tools

Contractionary Policy

(Tight Money)

•

Implemented when
the inflation rate is

high

Expansionary Policy

(Easy Money)

•

Implemented

when the economy

is in recession

Reserve
Requirement Rate

Increase

Decrease

Discount Rate/
Interest Rates

Increase

Decrease

Open Market
Operations

Sell government bonds
or securities

Buy/redeem
government-issued
bonds or securities

Maneuvering Monetary Policy

"​If the public understands the central bank's views on the economy and monetary policy, the households and businesses will take those views into account on making their spending and investment plans; policy will be more effective as a result."

Jerome Powell

Reminder: Reflective Essay # 3.1 next meeting.

Coverage: The Financial Sector and Monetary Policy

Assignment: Read and study Chapter 16 (The Foreign Sector), pages 285-

294, and answer the following items in your notebook:
1. Define the following terms:

a. International trade
b. Exports
c. Domestic Exports
d. Re-exports
c. Imports

2. When does a country have an absolute advantage in trade?
3. When does a country have a comparative advantage in trade?
4. What are the major exports and imports of the Philippines?
5. Who are the major trade partners of the Philippines?
6. What are the benefits of international trade?