Monetary Policy and Central Banking

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
College of Accountancy and Finance

CAF Review: M&M
30043: Monetary Policy and Central Banking
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CAF Review: M&M
1. Statement I. The Bangko Sentral may extend loans and advances to banking institutions
for a period of not more than thirty (30) days without any collateral for the purpose of
providing liquidity to the banking system in times of need.
Statement II. The amount of any emergency loan or advance shall not exceed the sum of
sixty percent (60%) of total deposits and deposit substitutes of the banking institution and
shall be disbursed in three (3) or more tranches.
a. Statement 1 is true
b. Statement 2 is true
c. Both statements are true
d. Both statements are false
2. Statement I. The Monetary Board is considered a Government Banker, Agent, and

Financial Adviser.
Statement II. If a bank or quasi-bank chronically has a reserve deficiency, the Monetary
Board must not limit or prohibit the making of new loans or investments by the institution
and must not require that part or all of the net profits of the institution be assigned to surplus.
3. Statement I. The Monetary Board is authorized to prescribe and modify the minimum
reserve ratios applicable to deposits denominated in foreign currencies.
Statement II. The powers of the Monetary Board to prescribe and modify reserve
requirements against unused balances of overdraft lines shall be the same as its powers with
respect to reserve requirements against demand deposits.
4. Statement I. The reserve position of each bank or quasi-bank shall be calculated monthly
on the basis of the amount, at the close of business for the month, of the institution's reserves
and the amount of its asset accounts against which reserves are required to be maintained.
Statement II. In order to facilitate Bangko Sentral control over the volume of bank credit,
the Monetary Board may establish maximum reserve requirements for unused balances of
overdraft lines.
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CAF Review: M&M

5. This section states that the Bangko Sentral may be authorised by the Government to
represent it in dealings, negotiations or transactions with the International Bank for
Reconstruction and Development and with other foreign or international financial
institutions or agencies.
a. Section 112 - Representation with Other Financial Institutions
b. Section 111 - Representation with the International Monetary Fund
c. Section 110 - Designation of Bangko Sentral as Banker of the Government
d. None of the above
6. This section states that the Bangko Sentral shall open a general cash account for the
Treasurer of the Philippines, in which the liquid funds of the Government shall be deposited.
a. Section 114 - Fiscal Operations
b. Section 113 - Official Deposits
c. Section 116 - Remuneration for Services
7. Statement I. The BSP helps in ensuring strong and sustainable economic growth by keeping
the inflation rate at an intermediate level.
Statement II. The BSP’s primary objective is to maintain price stability conducive to a
balanced and sustainable growth of the economy and employment.
Statement III. The BSP enjoys fiscal and administrative autonomy from the National
Government in the pursuit of its primary mandate.
a. Both statements I and III are true
b. Statement III is true
c. Both statements I and II are true
d. Statement II is true
8. The BSP also functions as the banker, financial adviser, and official agent of the
Government.
Statement I. As a government banker, the BSP may conduct the banking account of the
government.
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CAF Review: M&M
Statement II. As a government agent, the BSP performs the function of providing the
foreign currency required to meet governmental purchases of imports and serving foreign
debts.
Statement III. As a financial adviser, the BSP provides assistance by informing the
government on non-monetary and price movements.
a. Statement II is true
b. Both statements I and II are true
c. Statement I is true
d. Statement III is true
9. The basic function of this is to provide channels to transfer funds from savers with an excess
of funds to senders facing a shortage of funds.
a. Payment System
b. Financial System
c. Settlement System
d. Financial Intermediaries
10. Statement I. Indirect lending involves lending by the ultimate borrower to a financial
intermediary who pools the funds of many lenders in order to re-lend with a mark-up over
the cost of the funds.
Statement II. Direct lending involves the transfer of funds from the ultimate lender to the
ultimate borrower, most often through a third party.
a. Statement II is true
b. Both statements are true
c. Statement I is true
11. The financial system provides this type of service for borrowers and savers by allowing
savers to hold diversified assets.
a. Diversification
b. Information
c. Liquidity
d. Risk Sharing
12. A real-time gross settlement system owned and operated by the BSP where settlement is
done through the member-banks’ demand deposit accounts maintained with the BSP.
a. National Retail Payment System
b. National Payment System
c. Philippine Payments and Settlements System
d. Philippine Real-time Gross Settlements System
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CAF Review: M&M
13. Susan is on leave without pay for 90 days. If a labor force survey were conducted today,
how will be Susan classified?
a. Employed
b. Unemployed
c. Underemployed
d. Not part of the labor force
14. Prices rise at a slower pace as the unemployment rate increases.

a. True
b. False
15. Consumption is the purchase of capital goods.

a. True
b. False
16. The relationship between the spot exchange rate and forward exchange rate is influenced
by market expectations.
a. True
b. False
17. What are the most commonly quoted currency pairs?

a. GBP/USD, USD/JPY, USD/CHF, EUR/USD
b. EUR/JPY, GBP/USD, USD/CAD, AUD/USD
c. USD/GBP, USD/AUD, CHF/USD, USD/EUR
d. JPY/USD, CAD/USD, USD/EUR, AUD/USD
18. How are bid and ask prices quoted in the forex market?
a. In terms of the base currency only
b. In terms of the quote currency only
c. In terms of both the base and quote currency
d. In terms of the US dollar
19. The Bretton Woods Agreement prohibited countries from devaluing their currencies by
more than 10%.
a. True
b. False
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CAF Review: M&M
20. What are futures in the Foreign Exchange market?

a. Agreements to buy or sell foreign currency at a fixed rate for settlement at a
future date
b. Negotiated contracts between parties for exchanging currencies
c. Standardized versions of forward transactions traded on derivatives exchanges
d. Agreements to exchange currencies for a certain length of time and reverse the
transaction later
21. The delay between the time a macroeconomic problem arises and the time at which policy
makers become aware of it is called______.
a. Time Lag
b. Impact Lag
c. Recognition Lag
d. Implementation Lag
22. When interest rates are set too low, over-borrowing at artificially cheap rates can occur. This
can then cause a speculative bubble, whereby prices decrease too quickly and to absurdly
high levels.
a. True
b. False
23. It occurs when the general price levels of all goods and services in an economy increases.
By raising the target interest rate, investment becomes more expensive and works to slow
economic growth a bit.
a. Stagflation
b. Inflation
c. Deflation
d. None of these
24. It involves monetary policy makers setting their policy instruments on a day‐today basis as
economic events unfold, with no public commitments about its objectives or actions.
a. Rules
b. Inflation Targeting
c. Discretion
d. None of these
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CAF Review: M&M
25. The use of fiscal policy rules by financial analysts as an aid in forecasting actual changes in
the instruments would reduce uncertainty in the financial markets.
a. True
b. False
26. When interest rates are set too low, over-borrowing at artificially cheap rates can occur. This
can then cause a speculative bubble, whereby prices increase too quickly and to absurdly
high levels.
a. Risk of Inflation
b. Risk of Deflation
c. Risk of Hyperinflation
d. Risk of Increasing Interest Rate
27. Statement I: The salary of the Governor and the members of the Monetary Board from the
private sector shall be fixed by the legislature at a sum commensurate with the importance
and responsibility attached to the position.
Statement II: The powers and functions of the Bangko Sentral shall be exercised by the
Bangko Sentral Monetary Board, hereafter referred to as the Monetary Board.
a. First statement is true, second statement is false
b. First statement is false, second statement is true.
c. Neither first nor second statement is true.
d. None of the above.
28. Statement I: Any member of the Monetary Board may be appointed more than once.
Statement II: The members of the monetary board coming from the private sector shall not
hold any other public office or public employment during their tenure
a. Statement I is false
b. Statement II is true
c. Both statement is false
d. Both statement is true
29. The demand for money which is affected by several factors such as income levels, interest
rates, price levels (inflation), and uncertainty is explained in terms of the three primary
reasons to hold money except which of the following?
a. Arbitrative
b. Precautionary
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CAF Review: M&M
c. Transactions
d. Speculative
30. This is determined by the equilibrium of the supply and demand for money.
a. Quantity of money
b. Money Supply
c. Short-term interest rate
d. Long-term interest rate
31. Under a floating exchange rate system, if more dollars are demanded than are offered, the
price of the dollar in terms of the peso will tend to:
a. Decrease
b. Increase
c. Change
d. No effect.
32. Which of the following does not include in the 5 C's of credit risk?
a. Character
b. Capacity
c. Concentration
d. Condition
33. It estimates how much a set of investments might lose, given market normal conditions, in
a set time period such as a day.
a. Market Risk
b. Capital Adequacy Ratio
c. Value at Risk
d. Operational Risk
34. It is used to protect depositors and promote stability and efficiency of financial systems
around the world.
a. Market Risk
b. Capital Adequacy Ratio
c. Value at Risk
d. Operational Risk
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CAF Review: M&M
35. It is a risk that arises from the volatility in the stock prices.
a. Interest rate risk
b. Equity price risk
c. Foreign exchange risk
d. Commodity price risk
36. Statement I. An expansionary monetary policy is used to reduce unemployment during

recessionary periods.
Statement II. Implementing a contractionary monetary policy is highly likely to result in a
decrease in the level of net exports.
a. Statement I is true while Statement II is false.
b. Statement I is false while Statement II is true.
c. Both statements I and II are true.
d. Both statements I and II are false.
37. Inflation targeting is used under the assumption that there is a stable and predictable
relationship between money and the price level.
a. True
b. False
38. Statement I. There will be an increase in the money supply due to the open market sale of
securities by BSP to banks.
Statement II. There is a direct relationship between the reserve requirement and the money
supply.
a. Statement I is true while Statement II is false.
b. Statement I is false while Statement II is true.
c. Both statements I and II are true.
d. Both statements I and II are false.
39. What transaction creates a more permanent effect on the banking system’s level of money
supply?
a. Repurchase Agreements
b. Reverse Repurchase Agreements
c. Outright Purchases and Sales of Securities
d. Rediscounting
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CAF Review: M&M
40. It consists of quantitative and qualitative limits on the ability of banks to undertake certain
activities.
a. Reserve Requirement
b. Direct Controls
c. Open Market Operations
d. Moral Suasion
41. It is the mechanism through which money is transferred between savers and borrowers,
buyers and sellers, or from one party to another party.
a. Market Arrangement
b. Real Time System
c. Deferred Settlement System
d. National Payments System
42. The implementation of Real-Time Gross Settlement (RTGS) systems worldwide is driven
by the goal to maximize risks in high-value payment systems.
a. True
b. False
43. Who acts as the operator of the Philippine Payments and Settlements Systems (PhilPaSS)?
a. Admin Service Unit
b. Customer Service Unit
c. Technical Services Unit
44. What pillar of central banking mandates the BSP to act as a supervisor of financial
institutions under its jurisdiction?
a. First Pillar
b. Second Pillar
c. Third Pillar
d. Fourth Pillar
45. A process in which off-site monitoring is part of the supervisory cycle.

a. Consolidated Supervision
b. Risk-based Supervision
c. Examination Report
d. Risk Assessment
46. Return on asset and return on equity is international benchmarks of liquidity in the core
metric set.
a. True
b. False
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CAF Review: M&M
47. It means that the operations of banks and other financial institutions are sound and stable
while remaining supportive of the country’s economic growth.
a. Economic Stability
b. Price Stability
c. Financial Stability
d. None of these
48. Which statement is/are correct about the New Central Bank/ R.A. No. 11211
I. Increase in capitalization from P50 million to P200 million.
II. Supervisory powers over credit granting businesses, money service businesses
and payments system operators.
III. More teeth in imposing administrative and criminal sanctions, to include, among
others, forfeiture of profits from unauthorised financial transactions.
IV. More legal protection to BSP officials
a. I, II, III
b. II,III,IV
c. I and II
d. III and IV
49. These are the roles of BSP in the National Payments System except;
a. Operator
b. Overseer and Supervisor
c. User and Catalyst
d. Analyst and Regulator
50. The counterparty will not meet an obligation for full value on due date or anytime
thereafter.
a. Liquidity Risk
b. Credit Risk
c. Settlement Risk
d. Legal Risk
51. These are the features of PhilPaSS except:

a. Gridlock resolution
b. Manual processing of transaction
c. Queuing and prioritization
d. Audit trail and system inquiries
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CAF Review: M&M
52. One of the PhilPaSS system components is Third Party System. Which of the following
are included:
I. eDvP/Repo
II. FX Trades
III. ATM Networks
IV. GS Trades
V. InstaPay
a. I,II,III,V
b. I,III,IV,V
c. I,II,III,IV
d. II,III,IV,V
53. Banks are treated the same under risk-based supervision.

a. True
b. False
54. It aimed to prevent double-leveraging of capital.

a. Consolidated Supervision
b. Risk-based Supervision
c. Supervisory Strategy
d. Risk Assessment
55. Who is the new governor of Bangko Sentral ng Pilipinas?

a. Eli M. Remolona
b. Felipe M. Medalla
c. Benjamin E. Diokno
d. Nestor Espenilla
56. Which of the following statements is/are incorrect?

Statement I. Profitability is one of the core metric sets which return on asset and return on
equity are both international benchmarks and BSP framework.
Statement II. Non-performing Loans and Non-performing Assets Ratios are one of the
BSP frameworks in Liquidity.
Statement III. The four core metric sets of financial stability indicators are Capital
Adequacy, Asset Quantity, Profitability, and Liquidity.
a. I only
b. I and II
c. III only
d. II and III
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CAF Review: M&M
57. These are used to monitor the current condition of the financial sector and assess its
vulnerability to shocks.
a. Financial Innovation
b. Financial Supervision
c. Financial Stability Indicators
d. Financial Stability Supervision
58. Who is the first governor of Bangko Sentral ng Pilipinas?

a. Miguel Cuaderno Sr.
b. Jose Cuisia Jr.
c. Gabriel Singson
d. Rafael Buenaventura
59. If transactions are the lifeblood of market economies, then payment systems are the
________ for these transactions.
a. Regulatory Systems
b. Circulatory Systems
c. Monetary Systems
60. These are conventions, regulations, and contracts for producing, pricing, delivering, and
acquiring the various payment instruments and services.
a. Market arrangements
b. Payment instrument
c. Financial institution
d. Payment infrastructure
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CAF Review: M&M
ANSWER KEY with EXPLANATION
1. D. Both statements are false.

[Statement 1] According to Section 83. Loans for Liquidity Purposes, the Bangko Sentral
may extend loans and advances to banking institutions for a period of not more than seven
(7) days without any collateral for the purpose of providing liquidity to the banking system
in times of need.
[Statement 2] According to Section 84. Emergency Loans and Advances, the amount of any
emergency loan or advance shall not exceed the sum of fifty percent (50%) of total
deposits and deposit substitutes of the banking institution and shall be disbursed in two (2)
or more tranches.
[Statement 1] The Bangko Sentral ng Pilipinas is considered a Government Banker, Agent,
and Financial Adviser.
[Statement 2] According to Section 101. Reserve Deficiencies, If a bank or quasi-bank
chronically has a reserve deficiency, the Monetary Board may limit or prohibit the making
of new loans or investments by the institution and may require that part or all of the net
profits of the institution be assigned to surplus.
3. C
[Statement 1] According to Section 100. Computation on Reserves, the reserve position of
each bank or quasi-bank shall be calculated daily on the basis of the amount, at the close
of business for the day, of the institution's reserves and the amount of its liability accounts
against which reserves are required to be maintained.
[Statement 2] According to Section 98. Reserves Against Unused Balances of Overdraft
Lines, in order to facilitate Bangko Sentral control over the volume of bank credit, the
Monetary Board may establish minimum reserve requirements for unused balances of
overdraft lines.
5. A
6. A
7. D. The first and second statements are false. The BSP helps in ensuring a strong and
sustainable economic growth by keeping inflation low.
8. C. The second and third statements are false. As a government agent, the BSP performs the
function of providing the foreign exchange required to meet governmental purchases of
imports and serving foreign debts. As a financial adviser, the BSP provides assistance by
informing the government on monetary and price movements.
9. B. The basic function of the financial system is to provide channels to transfer funds from
savers with an excess of funds to spenders facing a shortage of funds
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CAF Review: M&M
10. A. The first statement is false. Indirect lending involves lending by the ultimate lender to
a financial intermediary who pools the funds of many lenders in order to re-lend with a
mark-up over the cost of the funds.
11. D
12. C
13. A. Even though Susan is on leave without pay for 90 days. She's still employed and part of
the labor force.
14. A. This comes from Phillips relation, an economic theory that inflation and unemployment
have a stable and inverse relationship. Which means higher unemployment rate (more
jobs) turns to lower inflation rate.
15. B. False, because consumption is the purchase of consumption goods. Consumption goods
provide benefits in the current period while capital goods provide benefits in future periods
(Investment).
16. B. The relationship is purely mathematical and has nothing to do with market expectations
as these are reflected in the spot rate.
17. A
18. C
19. A
20. C
21. C
22. B. False, because when interest rates are set too low, over-borrowing at artificially cheap
rates can occur. This can then cause a speculative bubble, whereby prices increase too
quickly and to absurdly high levels.
23. B
24. C
25. B. False because the use of monetary policy rules by financial analysts as an aid in
forecasting actual changes in the instruments would reduce uncertainty in the financial
markets.
26. C
27. B. According to Article II Section 13 of the Monetary Board, the salary of the Governor and
the members of the Monetary Board from the private sector shall be fixed by the President
of the Philippines at a sum commensurate to the importance and responsibility attached to
the position
28. A. According to Article II Section 6 of the Monetary Board paragraph three, NO member
of the Monetary Board may be reappointed more than once.
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CAF Review: M&M
29. A. Based on the theory of monetary policy under the demand of money, the three primary
reasons to hold money are the transactions, precautionary, and speculative.
30. C. Based on the theory of monetary policy under the Demand and Supply Curve illustration
and described; The short-term interest rate (i) is determined by the equilibrium of the
supply and demand for money.
31. B. Under a floating exchange rate system, if more dollars are demanded than are offered,
the price of the dollar in terms of the peso will tend to increase; that is, it will cost more
pesos to acquire one dollar. If, on the other hand, more dollars are offered than are
demanded, the value of the dollar in terms of the peso will tend to decrease; that is, it will
cost less peso to acquire one dollar.
32. C. 5 C's of credit risk are Character, Capacity, Condition, Capital, Collateral
33. C. Value at Risk (VaR) is a measure of the risks of investments.
34. B. Capital Adequacy Ratio (CAR) is a measure of a bank's capital. It is expressed as a
percentage of a bank's risk weighted credit exposure.
35. B
36. C
37. B. False because it is in monetary targeting, not inflation targeting, that assumes the stable
relationship between money and the price level.
38. D. Both statements I and II are false.
[Statement I] The open market sale of securities by BSP to banks results in a decrease, not
increase, in the money supply.
[Statement II] An increase in reserve requirement leads to a decrease in the money supply,
hence there is an inverse, not direct, relationship between the two.
39. C
40. B
41. D
42. B. False, because the goal is to minimize risks in high-value payment systems.
43. D
44. B
45. B
46. B. False, because these are international benchmarks of profitability in the core metric set.
47. C
48. B. II, III, IV, except I because the New Central Bank declares an increase in capitalization
from P50 billion to P200 billion.
49. D
50. B
51. B
52. C. InstaPay is not included in the 3rd Party System, it is Check Clearing.
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CAF Review: M&M
53. B. False, because risk-based supervision treats banks differently depending on each bank’s
demonstrated ability to manage risks. It does not penalize well-managed banks by making
them operate under standards designed to keep weak, poorly managed banks.
54. A
55. A
56. D. II and III
[Statement II.] Non-performing Loans and Non-performing Assets Ratios are one of the
BSP frameworks in Asset Quality.
[Statement III.] The four core metric sets of financial stability indicators are Capital
Adequacy, Asset Quality, Profitability, and Liquidity.
57. C
58. C. Gabriel Singson. He was the first Governor of the BSP after former President Fidel V.
Ramos signed the Republic Act 7653, otherwise known as New Central Bank Act, into law
in 1993.
59. B
60. A
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CAF Review: M&M
References
(Compiled By) Prof. Norie L. Maniego. Instructional Material for Fima 30043 Monetary Policy
and Central Banking.
(Compiled By) Prof. Aris G. Norberte. Instructional Materials for Fima 30043 Monetary Policy
and Central Banking.
Prof. Neil Angelo C. Halcon. Financial Supervision (FSS) - Financial Stability.

Efficient Payments and Settlements System (CSS)
Dr. Henry B. Prudente. The Foreign Exchange Market

Monetary Policy Lec 1- Macro Basic Concepts review
Central Banking: Overview of Risk Management and the Role of the
Central Bank
18

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

College of Accountancy and Finance

2. Statement I. The Monetary Board is considered a Government Banker, Agent, and

c. Both statements are true

14. Prices rise at a slower pace as the unemployment rate increases.

15. Consumption is the purchase of capital goods.

17. What are the most commonly quoted currency pairs?

20. What are futures in the Foreign Exchange market?

36. Statement I. An expansionary monetary policy is used to reduce unemployment during

45. A process in which off-site monitoring is part of the supervisory cycle.

51. These are the features of PhilPaSS except:

53. Banks are treated the same under risk-based supervision.

54. It aimed to prevent double-leveraging of capital.

55. Who is the new governor of Bangko Sentral ng Pilipinas?

56. Which of the following statements is/are incorrect?

58. Who is the first governor of Bangko Sentral ng Pilipinas?

ANSWER KEY with EXPLANATION

1. D. Both statements are false.

Prof. Neil Angelo C. Halcon. Financial Supervision (FSS) - Financial Stability.

Dr. Henry B. Prudente. The Foreign Exchange Market

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