TOOLS OF

MONETARY
POLICY
GROUP 6
GUZMAN, KIM TIFFANY
JAVINIAR, JIANH PEARL
MALONZO, MARY AILEEN B.
PANDIA, WELLA JOY
 PLACE

ANTIPOLO,
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UNTIP ALL ARE EASE SOUL

 SONG TITLE

ALL BY
MYSELF

HALL BUY MY SEW HELP

 CELEBRITY

VILMA
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BELL MOE WAS UNTOES

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LAWN
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LAST SUN KNEE YAH

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CAR WRIST THIN NUH AH GILL

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CRAZY
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 PLACES

SYDNEY,
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 SONG TITLE

ALWAYS BE
MY BABY

HALLOW ACE BEAM EYE BYE BEE

 FICTIONAL
CHARACTERS

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 BONUS

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SUPPLY & DEMAND CURVE
• MONEY SUPPLY CURVE
– Represents the total
supply liquid money in the
nation’s economy.
• MONEY DEMAND CURVE
– represents the demand
from money as an assets
and as a medium of
exchange which to buy
output or goods to produce
on the nation’s economy.
 Demand in the Market for
Reserves: Two Components
1.) Required Reserves:
The reserve ratio is the portion of
reservable liabilities that commercial
banks must hold onto, rather than lend
out or invest. This is a requirement
determined by the country's central
bank.
Demand in the Market for Reserves: Two
Components
2.) Excess reserves
• are capital reserves held by a bank or
financial
institution in excess of what is required
by regulators, creditors or internal
controls
Supply in the Market for Reserves: Two
Components
1.) NON – BORROWED RESERVES
• bank reserves that are not borrowed from
the central bank.
2.) BORROWED RESERVES – funds
borrowed by central bank in order to
maintain the reserve requirement.
Conventional Monetary Policy Tools

• It is a set of instruments available to a

central bank to control the money supply
level.
• It is stuctured around 3 axes: Open market
operations, reserve requirement ratios and
the discount rate
 OPEN MARKET OPERATIONS
• a monetary tool which involves the BSP
publicly buying or selling government
securities from banks and financial
institutions in order to expand or contract
the supply of money
 ADVANTAGES OF OPEN MARKET
OPERATIONS
• The BSP has complete control over the volume
• Flexible and precise
• Easily reversed
• Quickly implemented
 DISCOUNT POLICY
• The BSP extends discounts, loans and
advances to banking institutions in
order to influence the volume of credit
in the financial system.
• The rediscounting facility allows a
financial institution to borrow money
from the BSP using promissory notes
and other loan papers of its borrowers as
collateral.
ADVANTAGES AND DISADVANTAGES
OF DISCOUNT POLICY
• Used to perform role of lender of last
resort
• Cannot be controlled by the BSP; the
decision maker is the bank
• Discount facility is used as a backup
facility to prevent the BSP rate from
rising too far above the target
 RESERVE REQUIREMENT
• refer to the percentage of bank deposits and
deposit substitute liabilities that banks must
set aside in deposits with the BSP which they
cannot lend out, or where available through
reserve-eligible government securities.
• Changes in reserve requirements have a
significant effect on money supply in the
banking system, making them a powerful
means of liquidity management by the BSP
 DISADVANTAGES OF RESERVE
REQUIREMENTS

• No longer binding for most banks

• Can cause liquidity problems
• Increases uncertainty for banks
HOW CHANGES IN THE TOOLS OF MONETARY
POLICY AFFECT THE CENTRAL BANK OF THE
PHILIPPINES FUNDS RATE
• Effects of open an market operation
depends on whether the supply curve
initially intersects the demand curve in
its downward sloped section versus its flat
section.
• An open market purchase causes the
federal funds rate to fall whereas an open
market sale causes the federal funds rate
to rise (when intersection occurs at the
downward sloped section).
HOW CHANGES IN THE TOOLS OF MONETARY
POLICY AFFECT THE CENTRAL BANK OF THE
PHILIPPINES FUNDS RATE
• Open market operations have no effect on
the federal funds rate when intersection
occurs at the flat section of the demand
curve.
• If the intersection of supply and demand
occurs on the vertical section of the supply
curve, a change in the discount rate will
have no effect on the federal funds rate.
HOW CHANGES IN THE TOOLS OF MONETARY
POLICY AFFECT THE CENTRAL BANK OF THE
PHILIPPINES FUNDS RATE
• If the intersection of supply and demand
occurs on the horizontal section of the
supply curve, a change in the discount rate
shifts that portion of the supply curve and
the federal funds rate may either rise or fall
depending on the change in the discount
rate.
• When the Fed raises reserve requirement, the
federal funds rate rises and when the Fed
decreases reserve requirement, the federal
funds rate falls.
Thank You!
Quiz