Razel Ann Galit Monetary

Policy
Bsba Fm2 G2 Ma’am Susan Reyes

CHAPTER 2
Review Questions:

1. Define monetary standard.

A monetary standard is a system that determines the value of a country's currency by linking it
to a specific asset, such as gold or a foreign currency. It provides a framework for measuring
and exchanging wealth within an economy, ensuring stability and confidence in the currency's
value. The monetary standard guides monetary policy decisions and facilitates international
trade by establishing a consistent basis for transactions. Changes in the chosen standard can
impact inflation rates, economic stability, and exchange rates. Overall, the monetary standard
serves as a foundational pillar of a nation's financial system.

2. Explain the two broad types of monetary standards and their sub-classifications.

The two broad types of monetary standards are commodity standards and fiat standards.
Commodity standards are based on the value of tangible assets like gold or silver, ensuring that
the currency is directly convertible into a specific commodity at a fixed rate. Sub-classifications
of commodity standards include the gold standard, where currency is directly convertible into
gold, and the silver standard, which operates similarly but with silver as the backing.

3. Explain the characteristics of the gold coin standard.

The gold coin standard is a monetary system where the value of currency is directly tied to a
specific amount of gold. Under this standard, currency is issued in the form of gold coins and is
fully convertible into gold at a fixed rate. Governments maintain reserves of gold to support the
value of their currency, ensuring stability in exchange rates. Transactions are conducted with
physical gold coins, providing tangible backing for the currency's value. The gold coin standard
promotes confidence in the currency's worth and limits the government's ability to inflate the
money supply arbitrarily.

4. Explain the advantages of the gold bullion standard.

The gold bullion standard offers several advantages over other monetary systems. Firstly, it
provides greater flexibility in monetary policy compared to the gold coin standard, as gold bars
are also recognized as acceptable forms of currency. Secondly, the use of gold bullion facilitates
larger transactions and international settlements, as it eliminates the need for physically
handling large quantities of gold coins. Additionally, the gold bullion standard can help mitigate
the impact of fluctuations in the supply of gold coins, ensuring greater stability in the monetary
system. Furthermore, it allows for easier storage and transportation of wealth, as gold bars are
more compact and easier to secure than coins. Overall, the gold bullion standard combines the
stability of a gold-backed currency with the practicality of using gold bars for larger
transactions, making it a preferred monetary system for many economies.

5. Describe the gold exchange standard.

The gold exchange standard is a monetary system where currencies are indirectly linked to gold
reserves held by central banks. Instead of allowing direct convertibility into gold, currencies are
pegged to a specific quantity of gold and foreign currencies. Central banks maintain reserves of
both gold and foreign currencies to support their currency's value and stabilize exchange rates.
Transactions are conducted primarily in the national currency, with the value of the currency
determined by its exchange rate relative to gold and other reserve currencies. This system
provides a degree of stability in international trade and finance while allowing for greater
flexibility in monetary policy compared to the gold standard.

6. Explain the important characteristics of the gold exchange standard.

The gold exchange standard has several important characteristics. Firstly, it involves central
banks holding reserves of both gold and foreign currencies to support their currency's value.
Secondly, currencies are pegged to a specific quantity of gold but are not directly convertible
into gold. Thirdly, exchange rates are maintained through central bank interventions in
currency markets. Fourthly, the system relies on the stability of major reserve currencies, such
as the US dollar or British pound, to maintain confidence in the system. Lastly, the gold
exchange standard provides a framework for international trade and finance, balancing the
need for stability with the flexibility of monetary policy.

7. When is a country said to be in the bimetallic standard?

A country is said to be in the bimetallic standard when it recognizes both gold and silver as legal
tender at a fixed ratio. This means that both gold and silver can be used as mediums of
exchange in transactions within the country. The fixed ratio establishes the value relationship
between gold and silver within the monetary system. Countries adopting the bimetallic
standard often set legal tender laws specifying the type of coins that must be accepted for
payment, allowing for the coexistence of both metals in circulation. However, bimetallic
standards can face challenges if the market value of one metal diverges significantly from the
fixed ratio, leading to potential issues with currency stability and exchange rates.

8. If the ratio of silver to gold in the mint is 16 to 1 and it becomes 15 to 1 in the market,
which of the two metals become the cheaper metal? Why?

If the ratio of silver to gold decreases from 16 to 1 to 15 to 1 in the market, silver becomes the cheaper
metal. This shift occurs because it now takes fewer ounces of silver to exchange for one ounce of gold. In
other words, the relative value of silver has increased compared to gold in the market. Consequently,
individuals seeking to acquire gold would find it more cost-effective to exchange their silver for gold at
the revised ratio of 15 to 1. Thus, silver becomes the cheaper metal in terms of its exchange rate relative
to gold.

9. Explain Gresham's Law.

Gresham's Law states that "bad money drives out good." This principle arises when two forms of money
with the same legal tender status but differing intrinsic values circulate concurrently. When faced with
the choice between spending or hoarding money, people tend to retain the currency with higher
intrinsic value and circulate the currency with lower intrinsic value. Consequently, the currency with
lower intrinsic value becomes predominant in circulation, as individuals seek to rid themselves of it
while holding onto the more valuable currency. Gresham's Law highlights the tendency for inferior
money to displace superior money from circulation, leading to a debasement of the currency's overall
quality within an economy.

10. Explain the present monetary standard of the Philippines.

The present monetary standard of the Philippines is a fiat money system. In this system, the value of the
Philippine peso is not tied to any specific commodity such as gold or silver. Instead, the value of the peso
is determined by government decree and the confidence of the public in the currency's stability. The
central bank of the Philippines, Bangko Sentral ng Pilipinas (BSP), regulates the supply of money and
implements monetary policy to control inflation and maintain economic stability. The BSP also manages
foreign exchange reserves to support the value of the peso in international markets. Overall, the
Philippine monetary standard relies on trust in the government and central bank's ability to manage the
currency effectively.

11. Summarize the various kinds of money circulated in the Philippines during the:

During different periods in the Philippines, various forms of money circulated, including coins,
banknotes, treasury certificates, and emergency circulating notes. Coins were minted from various
metals such as copper, silver, and nickel and bore different denominations. Banknotes issued by the
government and authorized banking institutions served as paper currency, representing specific values.
Treasury certificates were also issued by the government, typically for larger denominations and often
used for official transactions. In times of crisis or instability, emergency circulating notes were issued by
local authorities or private entities to address temporary shortages of currency.

12. What were the monetary standards adopted during those periods?

During different periods in the Philippines, various monetary standards were adopted, including the
silver standard, gold exchange standard, and fiat money system. The silver standard was prevalent
during the Spanish colonial era, where the value of the currency was linked to a fixed amount of silver.
The American colonial period saw a transition to the gold exchange standard, where currencies were
pegged to the value of gold but backed by foreign currency reserves, particularly the US dollar. In more
recent times, the Philippines shifted to a fiat money system, where the value of the peso is determined
by government decree rather than being linked to a specific commodity.
 13. What was the value of the monetary unit of the Philippines during those periods?

The value of the monetary unit of the Philippines varied depending on the adopted monetary standard
during each period. Under the silver standard, the value of the currency was directly tied to a fixed
amount of silver. During the gold exchange standard era, the value of the currency was pegged to the
value of gold but was also influenced by fluctuations in foreign exchange rates, particularly against the
US dollar.

14. Differentiate the gold exchange standard from the dollar exchange standard.

The gold exchange standard fixes currencies to the value of gold but holds reserves in foreign currencies,
mainly the US dollar. In contrast, the dollar exchange standard directly fixes currencies to the value of
the US dollar, with central banks holding reserves primarily in US dollars to maintain exchange rates.
While both systems involve linking currencies to a stable reference currency, the gold exchange
standard provides more flexibility by allowing reserves to be held in various foreign currencies, while the
dollar exchange standard directly ties currency values to the US dollar.

15. Differentiate the gold standard fund from dollar standard fund.

The gold standard fund holds reserves in gold to back the currency, ensuring its stability and value. In
contrast, the dollar standard fund holds reserves primarily in US dollars to maintain exchange rates and
support the value of the currency. While both funds aim to uphold the value of their respective
currencies, the gold standard fund relies on gold reserves, while the dollar standard fund relies on
holdings of US dollars.
Razel Ann Galit Monetary
Policy
Bsba Fm2 G2 Ma’am Susan Reyes

CHAPTER 3

Review Questions

1. How is money measured? Explain each.

Money is measured in three main ways: M1 includes physical currency and demand
deposits, M2 adds savings deposits and money market funds, while M3 includes all of
M2 plus large time deposits and institutional money market funds.

2. Explain the aggregate demand curve.

The aggregate demand curve shows the total demand for goods and services at
different price levels in an economy, inversely related to the overall price level,
reflecting the relationship between the price level and real output demanded.

3. Explain the aggregate supply curve.

The aggregate supply curve represents the total quantity of goods and services that
firms are willing and able to produce at different price levels, showing a positive
relationship between the overall price level and the quantity of real output supplied.

4. Explain the factors that influence the shift of the aggregate demand curve.

Factors influencing the shift of the aggregate demand curve include changes in
consumer spending, investment levels, government spending, and net exports,
impacting overall demand in the economy.

5. Explain the factors that influence the shift of the aggregate supply curve.

Factors influencing the shift of the aggregate supply curve include changes in
production costs, technology, labor force participation, and government regulations
affecting the overall level of production in the economy.
6. Explain the determinants of the velocity of money.

The velocity of money is determined by the frequency at which money changes hands
within an economy, influenced by factors such as the availability of credit, consumer
confidence, and the efficiency of financial institutions. Additionally, the level of
economic activity and the speed at which transactions occur also impact the velocity of
money, with higher levels of economic activity typically leading to a faster circulation of
money. Changes in financial innovations and payment technologies can also affect the
velocity of money by altering the ease and speed of transactions.

7. What are the motives for holding money?

The motives for holding money encompass various reasons individuals and firms choose to hold
liquid assets. Firstly, the transaction motive involves holding money to facilitate day-to-day
transactions, ensuring easy access to funds for purchases and payments. Secondly, the
precautionary motive entails holding money as a buffer against unforeseen expenses or
emergencies, providing a financial safety net. Thirdly, the speculative motive involves holding
money in anticipation of favorable investment opportunities or changes in asset prices, allowing
for potential capital gains. Additionally, the hedging motive may lead to holding money to
mitigate risks associated with fluctuating asset prices or uncertain economic conditions. Lastly,
individuals and firms may hold money for convenience purposes, preferring the simplicity and
flexibility of cash or liquid assets for financial management.
Razel Ann Galit Monetary
Policy
Bsba Fm2 G2 Ma’am Susan Reyes

CHAPTER 8

QUESTIONS FOR REVIEW AND DISCUSSION

1. How important is the study of monetary theory in relation to stabilizing the economy?
Support your answer.

The study of monetary theory is crucial for stabilizing the economy as it provides
insights into how changes in money supply and interest rates impact economic variables
such as inflation, output, and employment. Understanding these relationships allows
policymakers to formulate effective monetary policies aimed at achieving price stability,
full employment, and sustainable economic growth.

2. When money can command less goods in exchange, what is its implication in terms of
the value of money?

When money can command fewer goods in exchange, it implies that the value of money
has decreased, leading to a decrease in purchasing power. This can result in higher
prices for goods and services, eroding the real value of savings and incomes, and
potentially leading to inflationary pressures in the economy.

3. What is the "quantity theory" of money?

The "quantity theory" of money posits that the overall price level in an economy is
directly proportional to the quantity of money in circulation, assuming that the velocity
of money and the level of real output remain constant. In other words, changes in the
money supply directly influence the price level, with increases in money supply leading
to proportional increases in prices.

4. What aggregates compose the national income?

The aggregates composing national income include consumption expenditure,

investment expenditure, government expenditure, and net exports. These components
represent the total spending in an economy, contributing to the calculation of the gross
domestic product (GDP) and providing insights into the overall economic activity and
performance.
5. When consumers receive income, they face two options. One is to spend. What is the
other?

When consumers receive income, they face two options: to spend it on goods and
services or to save it for future consumption or investment purposes. Saving allows
individuals to accumulate wealth over time, providing financial security and resources
for future needs or opportunities such as retirement, education, or investment.
6. What assumptions are indicated in the "transactions theory" of money?

The "transactions theory" of money assumes that individuals hold money balances for
the purpose of conducting transactions, requiring a certain level of liquidity to facilitate
daily spending needs. It suggests that the demand for money is directly related to the
level of economic activity and transactions, with fluctuations in money demand
influenced by changes in income and interest rates.

7. What is the "cash-balance approach" theory of money?

The "cash-balance approach" theory of money posits that individuals hold money
balances to achieve a desired level of liquidity, balancing the opportunity cost of holding
money against the benefits of liquidity.

8. What is meant by "monetary policy"?

"Monetary policy" refers to the actions undertaken by a central bank or monetary

authority to regulate the money supply and interest rates in an economy to achieve
specific macroeconomic objectives.

9. What are the tools of monetary policy?

The tools of monetary policy include open market operations, reserve requirements,
and discount rate adjustments. Open market operations involve buying or selling
government securities to influence the money supply and interest rates. Reserve
requirements refer to the amount of reserves that banks must hold against their
deposits, while discount rate adjustments involve changes in the interest rate at which
banks borrow from the central bank.

10. What are the goals of monetary policy?

The goals of monetary policy typically include maintaining price stability by controlling
inflation, promoting maximum employment by stabilizing output and employment
levels, and fostering sustainable economic growth by supporting stable financial
markets and reducing economic volatility. Additionally, central banks may aim to
achieve financial stability by safeguarding the integrity and resilience of the financial
system.