Part A.

Money and Banking

From the choices above choose the letter that correspond to the following statements.
a. Unit of account i. Toke
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 D, but
when money serves as a measure of relative worth, it functions as A, as money serve a
liquid asset it functions as a M.
2. All coins in circulation in in the Philippines are __I___ money, which means that their
intrinsic value is (less, greater) __J__ than the face value of coin.
3. Paper money and coins are considered (currency, checkable deposits) ___K___. The
major component of M1 is (currency, checkable deposits) __F__ and the minor
component is ______.
4. Credit cards (are, are not) __G___ considered money but rather a form the institutions
that issued the card.
5. Paper money is the circulating debt of (banks and other financial institution, Central Bank
of the Philippines) ___B___, while checkable deposits are the debt of ___P____.
6. The value of money varies _Q___ with the price level. To find the value of 1 Peso
_L___ 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 _E__ institution and a demand deposit may also
be called a ____.
 2. The balance sheet of the commercial bank is a statement of the bank’s _Asset__ the
claims of the owners of the bank, __J__, and claims of the nonowners called _F__.
3. The banking system used today is __O__ reserve system, which means that ___ of the
money deposited is kept on reserve.
4. There are two significant characteristics to the banking system today.
a. Banks can create __N___.
b. Banks are susceptible to __D__ or ‘runs’ and to prevent this situation from
happening, banks are subject to government _____.
5. When a person deposits cash in commercial bank receives a demand deposits in return,
the size of the money supply has ____.
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 P30,000.

Solution: because required reserves are P30,000 (20% of P150k)while actual reserves are
P50,000
7. This bank can safety expand its loans by a maximum of P20,000.
Solution:=(P50,000-P30,000)
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
____.
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 ____.
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
____.
Part C. How Banks Create Money

a. Increase h. Sell
b. Decease 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 __C__
market operations, changing the __D__ ratio, and changing the _L___.
2. When the Central Bank of the Philippines buy government securities in the open
market, the reserves of commercial banks will _A__ and when they sell government
securities in the open market, the reserves of commercial banks will _B__.
3. An increase in the reserve ratio will _B__ the size of the money multiplier and _B__
the excess reserves held by commercial banks, thus causing the money supply to
_B__. A decrease in the reserve ratio will _A__ the size of the money multiplier and
_A__ the excess reserves held by the commercial banks, thus causing the money
supply to _A__.
4. If the Bangko Sentral ng Pilipinas (BSP) were to lower the discount rate, commercial
banks would tend to borrow _(MORE)__ from them, and this would _A__ their
excess reeves.
5. To increase the money supply of the money, BSP should _F __ the reserve ratio, _J
__ securities in the open market and/or _B__ discount rate.
6. An easy monetary policy would characterized by actions of the BSP to _B__ the
discount rate, _B__ reserve ratios, and _J__ government bonds, whereas a tight
money policy would include actions taken to _A__ the discount rate, __A_ reserve
ratios, and _H__ government bonds.
7. The most effective and most often used tool of monetary policy is changed _K__ and
rarely use is changed in _I__ announcement effect is created by change in ___, 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.