Monetary Policy & Central Bank

Question 1

Changes in the price level are caused by an excess of total spending beyond the economy’s capacity to produce. If inflation is rapid and sustained the cause invariably is an over issuance of money by the central bank. When resources are already fully employed, the business sector cannot respond to excess demand by expanding output. Thus, excess demand bids up the prices of the limited output. “Too much spending chasing too few goods.

Answer 1

Demand-Pull Inflation

Question 2

is the rising of prices in terms of factors that raise per-unit production cost at each level of spending.

Per-unit production cost = total input cost / units of output. The rising per-unit production costs decrease profits that lead to reduced output firms are willing to supply at the existing price level. As such, the economy’s supply of goods and services declines and the price levels surge.

Answer 2

Cost Push Inflation

Question 3

Inflation affects the level of real output of an economy, and the direction and significance of this effect on output depends on the type of inflation and its severity.

Answer 3

True

Question 4

Abrupt and unexpected rises in key resource prices can sufficiently push up overall production costs to cause cost-push inflation. As prices increase, the quantity of goods and services demanded falls. Thus, firms respond by producing less output, and unemployment goes up.

Answer 4

Cost-push inflation and output

Question 5

Low levels of inflation reduce real output because inflation diverts time and effort toward activities designed to hedge against inflation.

Answer 5

Demand-pull inflation

Question 6

is the amount of by which the economy’s aggregate expenditures at the full-employment GDP exceed those just necessary to achieve the full-employment GDP. The effect of which is excessive spending will pull up output prices.

Answer 6

Inflationary Gap

Question 7

a sustain reduction in the general price level of prices, accompanied by declines in output and employment., A deliberate policy of reducing aggregate demand and output to reduce prices and imports and lower the exchange rate

Answer 7

Deflation

Question 8

The aggregate demand can be reduced by fiscal policy (increase taxes lower expenditures) or monetary policy (increase interest rate and slower growth or contraction of money supply).

Answer 8

True

Question 9

In statistics, the adjustments of index numbers or economic aggregates to eliminate effects of price changes, as in dividing an index of the gross domestic products at current prices by a price index to give index an index of GDP in real terms.

Answer 9

True

Question 10

A state of the economy in which there are unemployment resources by there is no inflationary pressure.

Answer 10

Deflationary Gap

Question 11

elimination or reduction of inflation.

Answer 11

Disinflation

Question 12

the simultaneous existence of unemployment and inflation. It is a kind of economic problem that arose when the natural rate of unemployment rose with strong wage pressure.

Answer 12

Stagflation

Question 13

a trade-off between unemployment and inflation. An inverse relationship between unemployment and inflation.

Answer 13

Phillips Curve concept by A.W. Phillips

Question 14

Government economic managers have two main tools for stabilization policy, which is a government action aimed to control or reduce economic fluctuations and instability associated with business cycle:

Answer 14

True

Question 15

set of measures or actions to effect changes in government expenditures and tax revenue to achieve full employment and non-inflationary output.

Answer 15

Fiscal Policy

Question 16

set of measures or actions taken by the central bank to affect the money supply and credit to achieve price stability, full employment, and economic growth.

Answer 16

Monetary Policy

Question 17

The monetary instruments used to effect monetary policy

Answer 17

Open market operations

Discount rate changes

Reserve requirement ratio changes

Question 18

Those tools or instruments affects the direction of changes in

Answer 18

Bank reserves, money supply, credit availability,

Interest rates, borrowing,

Security prices, and foreign exchange

Question 19

Targetting approaches

stabilize cost of borrowings for investment

Answer 19

Interest rate targeting approach

Question 20

Targetting approaches

indirectly controls general price level by controlling money supply

Answer 20

monetary aggregate targeting approach

Question 21

Targetting approaches

stability of the convertibility of currency

Answer 21

Foreign exchange targeting approach

Question 22

Targetting approaches

directly controls inflation rate to achieve price stability.

Answer 22

Inflation targeting approach

Question 23

Implementations of those instruments lead to either an expansionary monetary policy activities or restrictive or contractionary activities which aim to reduce and prevent economic fluctuations and to achieve economic stability. Those instruments are implemented to effect

Answer 23

Price stability

Economic growth

Low inflation

Full employment

Sustainable pattern of trade (domestic and international)

Question 24

is the central monetary authority that regulates banks, quasi-banks and non-financial institutions that perform similar functions of banks. It is the authority that gives direction on the areas of money, credit, and banks. Its main role is to control the money supply of the nation.

Answer 24

Central Bank

Question 25

Bangko Sentral ng Pilipinas created through Republic Act 7653, known as the new

Answer 25

Central Bank Act

Question 26

is a government own but operates independently. It is the central monetary authority that functions and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking, and credit.

Answer 26

Bangko Sentral ng Pilipinas

Question 27

The primary objective of the bangko sentral ng Pilipinas is to maintain price stability and also promote and maintain monetary stability and the convertibility of the peso. It also provides directions in the areas of money, banking, and credit. It supervise the operations of banks and exercise regulatory powers over the operations of finance companies and non-bank financial institutions performing quasi-banking functions and institutions performing similar functions.

Answer 27

True

Question 28

In previous decades, the BSP had used the ______that means the BSP determine the level of money supply needed for the desired level of inflation consistent with economic growth objectives as such the BSP indirectly controls inflation by targeting money supply

Answer 28

monetary aggregate targeting approach

Question 29

In 1995, the approach was modified to put emphasis on price stability than the rigid adherence to the targets set for monetary aggregates targeting approach. Also to address the inability of the monetary approach to account for the long and variable time lag effects. The BSP modified approach is to keep the actual inflation rate within program levels though it may exceed monetary targets.

Answer 29

True

Question 30

On January, 2000, the Monetary Board approved in principle the shift from inflation targeting approach as a framework for conducting

Answer 30

monetary policy

Question 31

focuses in achieving price stability consistent to the primary objective of the BSP. headline inflation is compared against inflation forecasts. The BSP uses various monetary policy instruments/tools at its disposal to achieve inflation target.

Answer 31

Inflation targeting

Question 32

an inter-agency body responsible for setting the annual government targets for macroeconomic variables, in paticular Gross National Income (GNI) and Gross Domestic Product (GDP) growth rate and inflation.

Answer 32

Development Budget Coordinating Committee,

Question 33

The National government sets the inflation target _____ahead in consultation with the BSP through the Development Budget Coordinating Committee,

Answer 33

Inflation target setting

Question 34

represents the policymakers desired inflation rate which they commit to achieve over the policy horizon while inflation forecast represents expectation or prediction of the inflation rate over the policy horizon, given current and available data

Answer 34

inflation target framework

Question 35

can change overtime because of new information coming in the assesssment of future inflation. It is also the major factor considered when deciding on whether monetary instruments should be adjusted to attain inflation target.

Answer 35

Inflation forecast

Question 36

BSP uses ____as a measurement in stating its monetary policy target.

Answer 36

CPI rate of change

Question 37

is a measure of the average prices of a standard basket of goods and services consumed by a typical family.

Answer 37

Headline inflation

Question 38

also monitors headline inflation and it is being announced to the public with a short time lag.

Answer 38

National Statistics Office

Question 39

also monitors core inflation which is a measure in the change in average consumer prices after excluding from the CPI certain items with volatile movements.

Answer 39

BSP

Question 40

the BSP uses a suite of quantitative macroeconomic models to forecast inflation over a policy horizon of two years and in conducting policy simulations and analysis.

Answer 40

True

Question 41

Beginning of 2012, the monetary board has held meetings 8x a year with meeting intervals of 6-8 weeks to deliberate, discuss, and decide on the appropriate monetary stance of the BSP.

Answer 41

True

Question 42

Explanation clauses or exemptions to the inflation target. It is a predefined set of acceptable circumstances under which an inflation-targeting central bank may fail to achieve its inflation target. These exemptions recognize the limitations of monetary policy and deviations from the inflation target may occur due to factors beyond the control of the central bank.

Answer 42

True

Question 43

is the rate of change in the average prices of goods and services purchased by consumers. It is measured as the annual percentage change in the Consumer Price Index. captures the changes in the cost of living based on the movements of the prices of item in the basket of goods and services consumed by the typical Filipino household.

Answer 43

Headline inflation

Question 44

represents the average price of a standard basket of goods and services consumed by a Filipino family for a given period.

Answer 44

Consumer Price Index (CPI)

Question 45

is volatile or changes anytime and influenced by factors beyond the control of economic policy.

Answer 45

CPI inflation

Question 46

The Core inflation measurement excludes the changes in the price levels of commodities caused by short-live shocks or disturbances independent from economic and monetary policy. Core inflation measurement shows if the price movements are caused by temporary disturbances or by permanent price trend which are necessary in the formulation of economic and monetary policy.

Answer 46

True

Question 47

measures the change in average consumer prices after excluding from the Consumer Price Index (CPI) items which have volatile price movements like foods and energy. It is used to measure the underlying trend or movement in the average consumer prices.

Answer 47

Core Inflation

Question 48

computes core inflation by removing the prices of fixed, pre-specified set ofitems form the CPI basket of goods.

Answer 48

Exclusion method.

Question 49

The standard basket consists of consumption items such as food items, clothing, water and electricity which price movements are monitored to determine the change in CPI or the level of inflation.

Answer 49

True

Question 50

a measure that takes the average inflation rate after excluding a specified percentage of extreme positive and negative price changes.

Answer 50

Trimmed mean

Question 51

a measure that takes the median inflation rate which corresponds to a cumulative CPI weight of 50 perccent from the highest-lowest ranking.

Answer 51

Weighted mean

Question 52

it is an estimation of core inflation by way of estimating or calculating a statistical relationship between inflation and other relevant economic variable.

Hence, the estimated regression model is used to generate estimates of core inflation each month using the actual data for the other variables in the model.

Answer 52

Econometric techniques

Question 53

Central Banks evolve mostly from private banks or companies and funded either with private capital or joint private and public capital. Some of the oldest central banks are Bank of England which was organized as joint-stock company and nationalized by the British Parliament in 1946; Bank of France was created in 1800 from private and government capital; and Riksbank of Sweden was established as private bank in 1656, then reorganized as a state bank in 1668 and gradually developed into a central bank.

Answer 53

True

Question 54

Central Banks are created and established by governments and in subsequent years, countries all over the world created their own central banks.

Answer 54

True

Question 55

In the Philippines, in 1948, the Central Bank of the Philippines was created. Then followed by rural banking system in 1952, offshore banking system in 1977 which allowed multinational banks to operate in the Philippine financial system.

Answer 55

True

Question 56

By 1980’s, series of laws were introduced and amended such as General Banking Act, Savings and Loan Associations Act, Private Development Banks Act, Charter of the Development Bank of the Philippines, Investment Houses Act, and the Central Bank Act.

Answer 56

True

Question 57

In 1993, the Central Bank of the Philippines created in 1948 is replaced by Bangko Sentral ng Pilipinas. Currently, the central bank of the Philippines is known as Bangko Sentral ng Pilipinas, which was established and organized through Republic Act No. 7653, known as The New Central Bank Act, passed by the House of Representatives and the Senate on June 10, 1993. The powers, duties and functions of the original Central Bank of the Philippines were transferred to the Bangko Sentral ng Pilipinas.

Answer 57

True

Question 58

Issuer of currency and manager of foreign reserves. Central banks print money, distributes notes and coins, intervene in foreign-exchange markets to regulate the national currency’s rate of exchange with other currencies, and manage foreign-asset reserves to maintain the external value of the national currency.

Answer 58

Functions of Central Banks

Question 59

Banker to the government. Central banks provide bank deposits and borrowing facilities to the government while at the same time acting as the government’s fiscal agent and underwriter. To carry out government activities such as tax collections, expenditures, and sells and redeems of bonds, the government uses the central bank’s facilities.

Answer 59

Functions of Central Banks

Question 60

Banker to domestic commercial bank. Central banks provide bank deposit and borrowing facilities to commercial banks, charging them an interest rate known as discount rate, and act as a lender of last resort to financially troubled commercial banks. Central Banks also provide means for collecting and clearing of checks

Answer 60

Functions of Central Banks

Question 61

Regulator of domestic financial institutions. Central banks ensure that commercial banks and other financial institutions conduct their business prudently and in accordance with relevant laws and regulations. Also, Central banks monitor reserve ratio requirements and supervise the conduct of local and regional banks.

Answer 61

Functions of Central Banks

Question 62

Operator of monetary and credit policy. Central banks attempt to manipulate monetary and credit policy instruments (the domestic money supply, the discount rate, the foreign exchange rate, commercial bank reserve ratio requirement, and others) to achieve major economic macroeconomic objectives such as controlling inflation, promoting investment, or regulating international currency movements

Answer 62

Functions of Central Banks