Lovely L.

De Castro
BSMA 2
Part A. Money and Banking
From the choices above choose the letter that correspond to the following statements.
a. Unit of account i. Token
b. Central Bank of the Philippines j. Less
c. Greater k. Currency
d. Medium of Exchange l. Divide
e. Currency m. Store of value
f. Checkable deposits o. Directly
g. Are not p. Bank and thrift
h. Paper q. Inversely

1. When money is usable for buying and selling goods and services. It functions as a
medium of exchange, but when money serves as a measure of relative worth, it functions
as a unit of account, as money serve a liquid asset it functions as a store of value.
2. All coins in circulation in in the Philippines are token money, which means that their
intrinsic value is (less, greater) less than the face value of coin.
3. Paper money and coins are considered (currency, checkable deposits) currency. The
major component of M1 is (currency, checkable deposits) checkable deposits and the
minor component is currency.
4. Credit cards (are, are not) are not considered money but rather a form of loan the
institutions that issued the card.
5. Paper money is the circulating debt of (banks and other financial institution, Central Bank
of the Philippines) Central Bank of the Philippines, while checkable deposits are the
debt of bank and thrift.
6. The value of money varies inversely with the price level. To find the value of 1 Peso
divide 1 by the price level.
Part B. How Banks Create Money

a. Checkable i. Required
b. Total j. Net worth
c. Reserves k. Less than 100 percent
d. Panics l. Cash
e. Thrift m. Actual
f. Liabilities n. Money
g. Reserves o. Fractional
h. Increased p. Decreased
From the choices above choose the letter that correspond to the following statements
1. A commercial bank may also be called a thrift institution and a demand deposit may also
be called a money.
2. The balance sheet of the commercial bank is a statement of the bank’s reserves the
claims of the owners of the bank liabilities and claims of the nonowners called net worth.
3. The banking system used today is required reserve system, which means that less than
100 percent of the money deposited is kept on reserve.
4. There are two significant characteristics to the banking system today.
a. Banks can create reserves.
b. Banks are susceptible to panics or ‘runs’ and to prevent this situation from
happening, banks are subject to government total.
5. When a person deposits cash in commercial bank receives a demand deposits in return,
the size of the money supply has increased.
Use the following balance sheet for the CBA National Bank to answer the questions 6 to 10.
Assume the required ratio is 20 percent.
Assets Liabilities and Net Worth
Reserves PHP 50,000 Demand Deposits PHP 150,000
Loans 70,000 Capital Stock 100,000
Securities 30,000
Property 100,000

6. This commercial bank has an excess reserve of

Actual - required
50000 – 30000 = 20000
required reserves are P30,000 (20% of P150k) actual reserves are P50,000.

7. This bank can safety expand its loans by a maximum of

70,000 + 20,000 = 90,000

8. Using the original balance sheet, assume that the bank makes a loan of PHP10,000 and
has check cleared against for the loan: then its reserve and demand deposits will now be

Reserve = 70,000+10,000 = 80,000 - 130,000 = 50,000

Demand Deposits = 150,000 + 10,000 = 160,000

9. Using the original balance sheet, assume that the bank makes a loan of PHP20,000 and
has check cleared against for the loan: then it will have an excess reserve of ____.

Excess Reserve = 70,000+20,000 = 90,000 - 140,000 = 50,000-30,000=20,000

 10. Using the original balance sheet, assume that the bank makes a loan of PHP10,000 and
has check cleared against for the loan: then its reserve and demand deposits will now be
Reserve = 70,000+10,000 = 80,000 - 130,000 = 50,000
Demand Deposits = 150,000 + 10,000 = 160,000
Part C. How Banks Create Money

a. Increase h. Sell
b. Decrease i. Reserve ratio
c. Open j. Buy
d. Reserve k. Open Market Operation
e. Raise l. Discount
f. Lower m. Interest Rate

1. The three tools the monetary authority uses to control the money supply are Open
Market Operation, changing the reserve ratio, and changing the discount.
2. When the Central Bank of the Philippines buy government securities in the open
market, the reserves of commercial banks will increase and when they sell
government securities in the open market, the reserves of commercial banks will
decrease.
3. An increase in the reserve ratio will decrease the size of the money multiplier and
decrease the excess reserves held by commercial banks, thus causing the money
supply to decrease. A decrease in the reserve ratio will increase the size of the
money multiplier and increase the excess reserves held by the commercial banks,
thus causing the money supply to increase.
4. If the Bangko Sentral ng Pilipinas (BSP) were to lower the discount rate, commercial
banks would tend to borrow reserve from them, and this would decrease their excess
reserves.
5. To increase the money supply of the money, BSP should lower the reserve ratio, buy
securities in the open market and/or decrease discount rate.
6. An easy monetary policy would characterized by actions of the BSP to lower the
discount rate, lower reserve ratios, and buy government bonds, whereas a tight
money policy would include actions taken to raise the discount rate, raise reserve
ratios, and sell government bonds.
7. The most effective and most often used tool of monetary policy is changed Open
Market Operation and rarely use is changed in interest rate announcement effect is
created by change in discount, but it is relative weak because many banks may not be
inclined to borrow even at the lower rate.
Problem Solving
1. If the Bangko Sentral ng Pilipinas (BSP) were to sell PHP 10 million government bonds
to the public and the reserve ratio were 25 percent, the money supply would be reduced
by 10M pesos, and the reserves of commercial banks would be reduced by 10M pesos.
But if these bonds were sold to the commercial banks, the supply of money would
immediately be reduced by 7.5M pesos and the excess reserve of the bank would be
reduced by 0 pesos.