PROBLEMS

For each of the following actions (tools used) by Central bank:

Tools:

A. Central bank purchases bonds

B. Central bank increases reserve requirements

C. Central bank sells dollars

D. Government (through a chartered bank) deposits money at Central bank

E. BSP advances funds to banks (through chartered banks) at lower rediscount rate

(bank rate)

1. Determine whether it is an expansionary policy or contractionary policy.

2. Analyze its impact on:

A. the supply of money; and

B. equilibrium interest rate and equilibrium quantity of money.

C. the economy (i.e., production and spending)

Note: For this part, you have to illustrate the appropriate diagram (D-S diagram and the

corresponding changes/shifts in the money supply brought about by the policy) and

state what happens to equilibrium rate and quantity of money.