• Medium of Exchange – Eliminates the
inefficiencies of barter trade
• Store of Value – Retains value for
future transactions
• Unit of Account – Standard measure of
prices
•
•
•
•
→
•
•
•
→ → →
₱
• Open Market Operations – Buying/selling
government securities
• Discount Rate – Interest rate for banks
borrowing from the central bank
• Reserve Requirement – Minimum reserves
banks must hold
• Expansionary - Increases money
supply (lowers interest rates)
• Contractionary - Reduces money
supply (raises interest rates)
MONETARY
POLICY AND
ECONOMIC
STABILITY
MONETARY POLICY
Monetary policy refers to the process by which a
central bank (such as the Federal Reserve,
European Central Bank, or Bangko Sentral ng
Pilipinas) controls the money supply, interest
rates, and credit availability to achieve economic
stability.
OBJECTIVES OF
MONETARY POLICY
THE FOUR KEY GOALS OF
MONETARY POLICY
[Link] Stability – Controlling inflation by
regulating money supply and interest
rates.
[Link] Growth – Ensuring steady GDP
growth through proper liquidity.
THE FOUR KEY GOALS OF
MONETARY POLICY
4. Full Employment – Maintaining
optimal job availability in the economy.
5. Exchange Rate Stability – Preventing
large fluctuations in currency value.
TOOLS OF
MONETARY
POLICY
THE THREE MAIN TOOLS OF
MONETARY POLICY
[Link] Market Operations (OMO)
• The buying and selling of government securities (bonds) in
the open market to control liquidity.
• Buying bonds injects money into the economy →
Expansionary policy.
• Selling bonds removes money from circulation →
Contractionary policy.
THE THREE MAIN TOOLS OF
MONETARY POLICY
2. Discount Rate
• The interest rate the central bank charges commercial banks
for short-term loans.
• Lowering the discount rate encourages borrowing →
Economic growth.
• Raising the discount rate discourages borrowing → Slows
down inflation.
THE THREE MAIN TOOLS OF
MONETARY POLICY
3. Reserve Requirement Ratio (RRR)
• The percentage of total deposits that commercial banks
must hold in reserve rather than lend out.
• Higher reserve requirement → Banks lend less → Money
supply decreases.
• Lower reserve requirement → Banks lend more → Money
supply increases.
EXPANSIONARY VS.
CONTRACTIONARY
MONETARY POLICY
EXPANSIONARY MONETARY POLICY (EASY
MONEY POLICY)
• Used when the economy is in recession or
experiencing low inflation.
Actions: Effects:
• Lowering interest rates • Encourages borrowing and
investment
• Reducing the reserve
• Increases consumer spending
requirement • Boosts employment and
• Buying government bonds economic growth
CONTRACTIONARY MONETARY POLICY
(TIGHT MONEY POLICY)
• Used when the economy is overheating or
experiencing high inflation.
Actions: Effects:
• Increasing interest rates • Reduces money supply
• Raising the reserve • Slows down consumer
requirement spending and borrowing
• Selling government bonds • Controls inflation
IMPACT OF MONETARY POLICY
ON THE ECONOMY
• Inflation Control - By adjusting money supply,
the central bank prevents hyperinflation or
deflation.
• Economic Growth - Proper monetary policy
fosters a balanced and sustainable GDP
increase.
IMPACT OF MONETARY POLICY
ON THE ECONOMY
• Employment Levels - Low interest rates lead to
job creation, while high rates can reduce hiring.
• Exchange Rate Fluctuations - Higher interest
rates attract foreign investment, strengthening
the national currency.
Thank you