Bukidnon State University

College of Business
Business Administration Department

FM Pr 8
Monetary Policy
and
Central Banking

Jesus B. Juevesano, DM
Joyce Cecile D. Carbajal, DM
Ma. Cristina B. Balingit, MMBM
 PREFACE
The module builds on the informational asymmetries and the resulting market
failures to examine the origins of financial intermediaries, their interactions with the
financial markets and the impact of regulation on the financial system and monetary
policy, It also looks at key issues in the theory and practice of financial markets,
banking, monetary policy and importantly their interaction and how this impacts the
real world. It will relate this to recent economic events which have reverberated
worldwide. It is particularly suitable for students aiming for careers in financial
markets or further study in this area. The Money and Banking will look at some key
issues in the theory and practice of financial markets, monetary policy and banking
and how their interactions affect the real world. The financial system has undergone
many changes since the credit crunch and the Central Banks have had the task of
stimulating the economy, encouraging lending, managing inflation and exchange
rates. This course will focus on the financial system and monetary policy in countries
and present an opportunity to discuss the financial institutions and monetary policies
of different nations, evaluating their relative success in recovering from the financial
crisis.

In light of the Covid-19 pandemic, and in a departure from previous academic years,
the University has had to change the delivery of its programs, together with certain
University services and facilities for the academic year School Year 2020-2021. These
changes include the implementation of a hybrid teaching approach during the
pandemic which includes those with limited connection and those without internet
connection.

With the current trend to be addressed undeniable facts about how to finance or
materialize, this need is a very significant issue to attend. Moreover, aside from
materializing the plans to address the needs of government is another factor to be
addressed.

All of the plans are answer the need of the present situation will be done through
proper deliberation planning and the policy to be crafted. It is obvious that as to the
government projects to be implemented, the policy is among the backbone which
stands as strong and lawful reference for implementation.
TABLE OF CONTENTS
MODULE 1 01

MODULE 2 10

MODULE 3 27

MODULE 4 38

MODULE 5 53
Module 1 Discuss Monetary and Central Banking Theories and Policies and their
Application

TOPIC LEARNING OUTCOMES

At the end of this lesson, the students will be able to:
1. Discuss the Nature of Monetary policy and Central Theories and policies.
2. Discuss the application of monetary and Central Bank theories and policies in the
Asian Economy.
3. Analyze the theoretical basis and practical implementation of monetary policy, the
adequacy of the current state of economy or finances, and the challenges of the
development of state and the society.

INTRODUCTION

Monetary policy is a central bank's actions and communications that manage the
money supply. The money supply includes forms of credit, cash, checks, and money
market mutual funds. The most important of these forms of money is credit. Credit
includes loans, bonds, and mortgages.

Monetary policy increases liquidity to create economic growth. It reduces liquidity to

prevent inflation. Central banks use interest rates, bank reserve requirements, and the
number of government bonds that banks must hold. All these tools affect how much
banks can lend. The volume of loans affects the money supply.

Philippines was in robust position going into the pandemic. BSP did its part by
aggressively easing monetary policy and launching several liquidity-enhancing
measures to mitigate economic and financial fallout from COVID-19 pandemic,
complementing fiscal response from National Government. However, the shape of
economic recovery remains highly uncertain with risk heavily tilted to the downside.
The economic sectors are affected differently and need targeted fiscal, monetary and
financial measures, with fiscal policy continuing to play a dominant role. Going
forward, the BSP will remain data-driven in calibrating monetary policy as it considers
the range of tools and policy measures available that may be required to combat the
crisis.

BSP has decidedly been proactive in easing monetary policy settings, providing
liquidity to the financial system, and relaxing regulatory rules. This is in pursuit of the
BSP’s policy measures to support credit activity and domestic demand, as well as
ensure the continuous and smooth functioning of domestic financial markets. “All
these measures show the BSP’s unwavering commitment and readiness to deploy its
full range of instruments to provide liquidity and ensure an efficient financial system,”

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Module 1 Discuss Monetary and Central Banking Theories and Policies and their
Application

What is Monetary Policy?

Figure 1.1

Understanding Monetary Policy

Monetary policy consists of the process of drafting, announcing, and implementing

the plan of actions taken by the central bank, currency board, or other competent
monetary authority of a country that controls the quantity of money in an economy
and the channels by which new money is supplied. Monetary policy consists of
management of money supply and interest rates, aimed at achieving macroeconomic
objectives such as controlling inflation, consumption, growth, and liquidity. These are
achieved by actions such as modifying the interest rate, buying or selling government
bonds, regulating foreign exchange rates, and changing the amount of money banks
are required to maintain as reserves

Economists, analysts, investors, and financial experts across the globe eagerly await
the monetary policy reports and outcome of the meetings involving monetary policy
decision-making. Such developments have a long-lasting impact on the overall
economy, as well as on specific industry sector or market.

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Module 1 Discuss Monetary and Central Banking Theories and Policies and their
Application

Monetary policy is formulated based on inputs gathered from a variety of sources. For
instance, the monetary authority may look at macroeconomic numbers like GDP and
inflation, industry/sector-specific growth rates and associated figures, geopolitical
developments in the international markets (like oil embargo or trade tariffs), concerns
raised by groups representing industries and businesses, survey results from
organizations of repute, and inputs from the government and other credible sources.

In light with the Covid-19 pandemic and the induced global lockdown are a truly
historic event. Never before has the global economy been deliberately put into an
induced coma. This is no normal recession, but one that results from explicit policy
choices to avoid a large-scale public health disaster. The pandemic has created a fog
of uncertainty, and this has greatly complicated our ability to generate a clear
outlook for growth and inflation. The course of the coronavirus is the biggest
source of uncertainty. Beyond that, we don't know how global trade and supply
chains will evolve, or what will happen with domestic supply and demand. We
don't know how consumer and business confidence will rebound, or whether
the pandemic will lead to lasting changes in savings and spending habits. With
the economy at least stabilizing, we are starting to get some line of sight, and
as more data arrive, we can begin to answer some of these questions. In our
July Monetary Policy Report, we expect to be able to provide a central planning
scenario for output and inflation, with a discussion of the main risks around
that scenario. Going forward, we will assess incoming information relative to
that scenario.

Monetary Policy Framework

In the aftermath of the Global Crisis, central banks in advanced economies faced a
number of challenges in designing monetary policy frameworks suitable for the post-
crisis environment. Inflation has remained persistently low and continues trending
downwards in many economies. The crisis urged central banks to pay more attention
to financial stability concerns. With nominal interest rates at the effective lower bound
(ELB), central banks ran out of conventional monetary policy ammunition to stimulate
the economy. Against this background, it was argued that the monetary policy
strategies used by central banks so far were too constrained to fight deep recessions
and paid too little attention to financial conditions.

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Module 1 Discuss Monetary and Central Banking Theories and Policies and their
Application

Pre-activity : Guess What?

Instruction: Rank the first Governor to incumbent governor in Bangko Sentral ng

Pilipinas from 1st BSP governor to 12th BSP governor.

Nestor Espenilla Gabriel C. Singson

Gregorio Licaros Andres V. Castillo

Rafael Buenaventura List of Central Amando M. Tetangco,

Jr.
Bank Governors

Alfonso Calalang Miguel Cuaderno, Sr.

Jose L. Cuisia Benjamin Jaime C. Laya Gabriel Singson

Diokno

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Module 1 Discuss Monetary and Central Banking Theories and Policies and their
Application

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Module 1 Discuss Monetary and Central Banking Theories and Policies and their
Application

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Module 1 Discuss Monetary and Central Banking Theories and Policies and their
Application

WARM-UP (PRE-ACTIVITY)

Read the following references about Monetary Policy and Central Banking. Then write
your summarized notes on the Monetary and Central Banking.

Source Information
CENTRAL BANKING IN THE The two major functions that have been
PHILIPPINES THEN NOW AND performed by the central bank ever since central
THE FUTURE.pdf banking was introduced in the country in 1948.
amberte, Mario. "Central banking in namely, 1) monetary policy and 2) bank
the Philippines: Then, Now and the supervision functions. These are the same
Future" (PDF). Philippine Institute functions performed by central banks in many
for Development Studies. countries. Although these have remained the core
Retrieved May 19, 2011. functions of the country's central bank, how they
are performed has changed considerably over the
last 25 years due to certain economic forces.

Republic Act No. 266 An Act Establishing the Central Bank of the Philippines,
Congress of the Philippines Defining its Powers in the Administration of the
15 June 1948 Monetary and Banking System, Amending the Pertinent
Provisions of the Administrative Code with Respect to
the Currency and the Bureau of Banking, , and for Other
Purposes Republic Act No. 265 Congress of the
Philippines 15 June 1948

BSP was granted independence by RA No. 7653,

promoting price stability in the face of both
serious supply and demand pressures was a tall
BusinessWorld Online order. Its latitude to act was limited to the small
Rethinking monetary policy volume of GS it could use for open market
Yet under its 1948 charter (RA No. operations in addition to calibrating the banks’
required reserve ratio (RRR).
265), the then Central Bank of the
Philippines (CBP) was permitted to
issue its own certificates of
indebtedness ... By Diwa C.
Guinigundo

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Module 1 Discuss Monetary and Central Banking Theories and Policies and their
Application

REFLECTION Base on your readings on

RA 266, How does this
ANALYSIS mandate supports the
Concept on learner
centered instruction?

_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

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Module 1 Discuss Monetary and Central Banking Theories and Policies and their
Application

SELF-EVALUATION

After reading the recommended references in the Warm-up Section, evaluate

yourself by placing a check mark on the column that best describes your ability
to comprehend the concepts. There are no wrong answers in this section, so
answer as objectively as possible.

Usually Sometimes Seldom Never

3 2 1 0
I am able to grasp the underlying
concept of Monetary Policy
I avoid confusing modified Monetary
aggregate targeting.
I learn that the two major functions that
have been performed by the central
bank ever since central banking was
introduced in the country in 1948 are
the monetary policy and 2) bank
supervision functions
I understand that monetary targets
could be exceeded as long as inflation
target are meet
I can identify the first and last
governors
TOTAL

Score Level of Proficiency

12-15 Proficient
8-11 Approaching Proficiency
4-7 Developing
3 and below Beginning

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

TOPIC LEARNING OUTCOMES

At the end of this lesson, the students will be able to:

1. Determine the role of Central Bank in the following industry establish

economy.
2. Navigate the Legislative and normative acts and regulatory regulating the
circulation and the use of instruments in their work.

Introduction

Central banks face challenges today that necessitate an integrated and comprehensive
evaluation of their structures, goals, conduct of policy, and even the traditional roles
assigned them. Modern-day central banks must deal with greater economic and
financial integration, progressively more deregulated and liberalized markets, greater
volatility in exchange rate markets and other asset markets, rapid financial innovation,
rapid technological progress, and ever more sophisticated players in financial markets
in search of above-normal returns. Rapid technological progress interacting with
deregulation has significantly altered the financial landscape within which central
banks operate. While these milestones deepened efficiency, they, nonetheless,
heightened uncertainties and risks for financial markets. The upshot of these
developments is that central banks are compelled to re-assess their long-established
ways of doing things. With the Asian financial crisis adding further impetus for
structural changes, the reform process gathered pace in its aftermath.

The Covid-19 pandemic and the induced global lockdown are a truly historic event.
Never before has the global economy been deliberately put into an induced coma. This
is no normal recession, but one that results from explicit policy choices to avoid a large-
scale public health disaster. The sudden shock called for a speedy and massive policy
response. The actions of central banks have again highlighted their central role in crisis
management as they swiftly cut policy interest rates and launched large-scale balance
sheet measures This brought central banks to the forefront again as they can mobilize
financial resources faster than any other authority. In this round of urgent policy
mobilization, central banks' actions concentrated on large-scale purchases of
government debt as well as credit support for firms and households. The latter
encompassed funding-for lending schemes, purchases of corporate debt, and support
provisions for small and medium-sized enterprises.

Three Objectives of Monetary Policy

Central banks have three monetary policy objectives. 1 The most important is to
manage inflation. The secondary objective is to reduce unemployment, but only after
controlling inflation. The third objective is to promote moderate long-term that, it

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

prefers a natural interest rates, for these objectives. It wants the core inflation rate to
be around 2%.2 Beyond ate of unemployment of between 3.5% and 4.5%.3

Contractionary vs. Expansionary

Types of Monetary Policy

Central banks use contractionary monetary policy to reduce inflation. They reduce the
money supply by restricting the volume of money banks can lend. The banks charge a
higher interest rate, making loans more expensive. Fewer businesses and individuals
borrow, slowing growth.

Central banks use expansionary monetary policy to lower unemployment and avoid
recession. They increase liquidity by giving banks more money to lend. Banks lower
interest rates, making loans cheaper. Businesses borrow more to buy equipment, hire
employees, and expand their operations. Individuals borrow more to buy more
homes, cars, and appliances. That increases demand and spurs economic growth. 5

Monetary Policy vs. Fiscal Policy

Ideally, monetary policy should work hand-in-glove with the national government's
fiscal policy. It rarely works this way. Government leaders get re-elected for reducing
taxes or increasing spending. As a result, they adopt an expansionary fiscal policy. To
avoid inflation in this situation, the Fed is forced to use a restrictive monetary policy. 6

The COVID-19 pandemic has triggered worldwide responses in all aspects of social
and economic functioning. The OECD is compiling data, analysis and
recommendations on a range of topics to address the emerging health, economic and
societal crisis, facilitate co-ordination, and contribute to the necessary global action
when confronting this enormous collective challenge. This new series brings together
policy responses spanning a large range of topics, from health to education and taxes,
providing guidance on the short-term measures needed in affected sectors and a
specific focus on the vulnerable sectors of society and the economy. Beyond immediate
responses, the content aims to provide analysis on the longer-term consequences and
impacts, paving the way to recovery with coordinated policy responses across
countries. Within the topic of 'Fiscal and Monetary Policies', the OECD provides
relevant resources on various aspects of COVID-19 response.

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

Monetary policy provides financial infrastructure and regulates money supply. Fiscal
policy through its instruments of taxation, borrowing and deficit spending has
considerable impact on the money supply and liquidity in the economy. Monetary
policy influences the aggregate demand, and, in turn, output, income and
employment, indirectly by regulating the flow of credit and money supply. Fiscal
policy has direct, through lagged, impact on aggregate demand.

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

POINTS TO PONDER

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

All central banks have three tools of monetary policy in common. First, they all use
open market operations. They buy and sell government bonds and other securities
from member banks. This action changes the reserve amount the banks have on hand.
A higher reserve means banks can lend less. That's a contractionary policy.

The second tool is the reserve requirement, in which the central banks tell their
members how much money they must keep on reserve each night. Not everyone needs
all their money each day, so it is safe for the banks to lend most of it out. That way,
they have enough cash on hand to meet most demands for redemption. Previously,
this reserve requirement has been 10%. However, effective March 26, 2020, the Fed has
reduced the reserve requirement to zero.8

Most central banks have many more tools. They work together to manage bank
reserves.

The Fed has two other major tools it can use. It is most well-known is the Fed funds
rate. This rate is the interest rate that banks charge each other to store their excess
cash overnight. The target for this rate is set at the FOMC meetings. The fed funds
rate impacts all other interest rates, including bank loan rates and mortgage rates. 10

The Fed, as well as many other central banks, also use inflation targeting. It sets
expectations that the banks want some inflation. The Fed’s inflation goal is 2% for the

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

core inflation rate.1 1 That encourages people to stock up now since they know prices
are rising later. It stimulates demand and economic growth.

When inflation is lower than the core, the Fed is likely to lower the fed funds rate.
When inflation is at the target or above, the Fed will raise its rate.

The Federal Reserve created many new tools to deal with the 2008 financial crisis.
These included the Commercial Paper Funding Facility and the Term Auction Lending
Facility.12 1 3 It stopped using most of them once the crisis ended.

Central Banks address the COVID 19

The sudden shock called for a speedy and massive policy response .The actions of
central banks have again highlighted their central role in crisis management as they
swiftly cut policy interest rates and launched large-scale balance sheet measures This
brought central banks to the forefront again as they can mobilize financial resources
faster than any other authority. In this round of urgent policy mobilization, central
banks' actions concentrated on large-scale purchases of government debt as well as
credit support for firms and households. The latter encompassed funding-for lending
schemes, purchases of corporate debt, and support provisions for small and medium-
sized enterprises. This last set of measures is designed to travel the "last mile". The
main objective is to prevent liquidity strains that could lead to bankruptcies of solvent
firms and leave long-lasting scars on growth potential. These extraordinary actions
were designed precisely to flatten the mortality curve of businesses.

Monetary Policy and Transmission Mechanism`

In understanding of the transmission mechanism is essential to the appropriate

design and implementation of monetary policy. Central banks must be alert to
changes in the structure of the economy because they tend to alter the way in
which a monetary policy change is transmitted to the economy. This concern
applies as well to the international transmission of policy changes.
The mechanisms by which changes in policy rates in advanced economies are
transmitted to the Philippine economy and finds that the exchange rate, risk-
taking in global financial markets and inflation expectations have been
significant channels of transmission. Moreover, changes in policy rates abroad
have had an indirect influence on the Philippine policy rate, thereby affecting
the outlook for Philippine inflation and growth.

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

Let’s do this!

WARM-UP (PRE-ACTIVITY)

Read the following references about ASEAN Monetary Policy and Central Banking,
fill up the column the name of the present Central Bank Governor and give brief
description of their respective monetary policy.

Governor

Headquarters BSP Complex, Roxas

Boulevard, Manila, Philippines
Coordinates 14°33′39″N 120°59′18″ECoordinates:
14°33′39″N 120°59′18″E

Established January 3, 1949; 71 years ago (as Central

Bank of the Philippines)
July 3, 1993; 27 years ago (re-established
due to the New Central Bank Act)

Ownership 100% state ownership[1]

Governor Benjamin Diokno
Central bank of Government of the Philippines
Currency Philippine peso
PHP (ISO 4217)
Reserves US$81 billion[2]
Bank rate 3.50%
Preceded by Philippine National Bank (1916-1949)
Central Bank of the Philippines (1949-1993)

Website www.bsp.gov.ph

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Module 2 Importance of Central Bank to the Financial services industry and to the
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Thailand central bank

Featured snippet from the web
The Bank of Thailand (BOT) (Thai: ธนาคารแห่งประเทศไทย) is
the central bank of Thailand.
Central bank of: Kingdom of Thailand
Reserves: 149 290 million USD
Currency: Thai baht; THB (ISO 4217)

KUALA LUMPUR: Malaysia's reserves remained usable as at

end-March 2019, with official reserve assets at US$103.01 billion
(RM426. 19 billion), in accordance with the International
Monetary Fund's Special Data Dissemination Standard format

Reserves: US$273.1 billion

Chairman: Tharman Shanmugaratnam
Bank rate: 1.67%
Currency: Singapore dollar; SGD (ISO 4217)
History · List of Chairmen · Issuing Banknotes and ... · Singapore
FinTech ...

Vietnam central bank

Featured snippet from the web
The State Bank of Vietnam (Vietnamese: Ngân hàng Nhà nước
Việt Nam; French: Banque d'État du Viêt Nam) is the central
bank of Vietnam. It currently holds an about 65% stake of
VietinBank - the country's largest listed bank by capital.
Reserves: 27 880 million USD

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Module 2 Importance of Central Bank to the Financial services industry and to the
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Currency: Vietnamese đồng; VND (ISO 4217)

Ownership: 100% state ownershi

Central Bank of Indonesia

Reserve USD127.9 billion at

HeadquartersNaypyidawEstablished3 April 1948 (as Union Bank

of Burma)Ownership100% state ownership[1]GovernorKyaw
Kyaw
Maung[2]Central bank ofMyanmar (Burma)CurrencyMyanmar
kyat
MMK (ISO 4217)Preceded byUnion Bank of Burma
People’s Bank of Union Bank of
BurmaWebsitewww.cbm.gov.mm

Brunei Central bank

The Monetary Authority of Brunei Darussalam (Malay: Autoriti
Monetari Brunei Darussalam, abbreviated as AMBD ) is
the central bank of Brunei. It was established under the Autoriti
Monetari Brunei Darussalam Order, 2010, and began operations
on January 1, 2011. It succeeded the Brunei Currency and
Monetary Board.
Currency: Brunei dollar; BND (ISO 4217)
Reserves: 2 890 million USD
Chairman: Haji Al-Muhtadee Billah

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

Headquarters Vientiane, Laos

Coordinates 17.9658°N
102.6070°ECoordinates:
17.9658°N 102.6070°E
Established 7 October 1968; 51 years ago
Ownership 100% state ownership[1]
Governor Xonexay Sithphaxay
Central bank of Laos
Currency Lao kip
Reserves 970 million USD[1]
Website http://www.bol.gov.la

Headquarters Phnom Penh, Cambodia

Established 23 December 1954; 65 years ago
Ownership 100% state ownership[1]
Governor Chea Chanto
Central bank of Cambodia
Currency Riel
Reserves 6 760 million USD[1]
Website [2]

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

Banco Central de Timor-Leste is the central bank of East Timor

located in its capital Dili. BCTL was formally established on 13
September 2011, replacing the Banking and Payments Authority
of Timor-Leste and the Central Payments Office. It is responsible
for the monetary policy. Wikipedia
Founded: 13 September 2011
Jurisdiction: Timor-Leste
Central bank of: East Timor
Reserves: 430 million U

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

CASE ANALYSIS

The Wizard of Oz symbolism goes incredibly deep, from the main characters to the
cyclone, those famous slippers, and even Toto. And the central message in the book is
all about the rise of Populism and the debate over gold versus silver. Group yourself
into five based on the format below and indicate the learning outcome of the case.
Submit it in the google classroom. Other groups shall submit the reflective essay about
the case.

Case Analysis The wizard of Oz, as a Monetary Allegory.

FORMAT

I-Facts of the Case

II- Point of View
III- Problems/ Objectives
IV- Areas of Consideration (SWOT ANALYSIS)
V- Courses of Action
VI- Conclusion
VII- Recommendation
VIII- References

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Module 2 Importance of Central Bank to the Financial services industry and to the
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SCORING OF TOPICS (USING ANALYTICS RUBRICS )

Standards

Criteria Fair (60-69%) Good (70-79%) Very Good (80- Excellent (90-
89%) 100%)

Knowledge of Demonstrates Demonstrates Demonstrates Demonstrates

forms, limited some knowledge considerable thorough and
conventions, knowledge of of forms, knowledge of insightful
terminology, and forms, conventions, forms, knowledge of
strategies relative conventions, terminology, and conventions, forms,
to the importance terminology, and strategies relative terminology, and conventions,
of sources to strategies relative to importance of strategies relative terminology, and
subject to importance of sources to subject to importance of strategies relative
sources to subject sources to subject to importance of
sources to subject

Critical and Uses critical and Uses critical and Uses critical and Uses critical and
creative thinking creative thinking creative thinking creative thinking creative thinking
skills skills with limited skills with skills with skills with a high
effectiveness moderate considerable degree of
effectiveness effectiveness effectiveness

Communication of Communicates Communicates Communicates Communicates

information and information and information and information and information and
idea idea with limited ideas with some ideas with ideas with a high
clarity clarity considerable degree of clarity
clarity and with
confidence

Quality of Argument is Argument takes Argument Argument is

argument and simple and on a fair and bridges on the complex and
presentation unoriginal, and expected position, complex and original, and the
the presentation and the original, and the presentation is
is weak and presentation is writing is clear strong, fluid, and
inconsistent moderately clear and coherent creatively
and coherent coherent

Based on the criteria of the rubrics you are expected to have a range rate from 80% to
100 %

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

______________________________

Enjoy the activities!

May I know your insights ?

ESSAY

Essay Type-Answer briefly the question below. Use at least 300 words to explain
your disposition.

1. Explain the fiscal policy actions used to stimulate the economy during the
recession, What is
This type of fiscal policy called?

2. Explain the monetary policy actions used to stabilize the economy in times of
inflation. What is this type of monetary policy called?

3. Explain the Fiscal Policy actions used to stabilize the economy in times of
inflation. What is this type of fiscal policy called?

4. What are the common goals of both fiscal and monetary policy?

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Module 2 Importance of Central Bank to the Financial services industry and to the
monetary stability of the economy

SELF-EVALUATION

After reading the recommended references in the Warm-up Section, evaluate yourself
by placing a mark on the column that best describes your ability to comprehend the
concepts. There are no wrong answers in this section, so answer as objectively as
possible.
Usually Sometimes Seldom Never
3 2 1 0

I am able to grasp the comparison of

Monetary and Fiscal Policy

I avoid confusing Contractionary and

Expansionary.

I learn the Monetary Policy Tools

I understand the Inflation Target

I learn that the Central banks use

contractionary monetary policy to
reduce inflation

I also learned that Central banks use

expansionary monetary policy to lower
unemployment and avoid recession.

TOTAL

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Module 2 Importance of Central Bank to the Financial services industry and to the
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REFLECTION LOG
MONETARY POLICY AND FISCAL POLICY
Topic
Student Name_____________________________
Purpose: Student monitors their learning through reflection prompts. The log
documents growth and learning overtime in the student’s words. The log is used as
feedback on the topics being discussed and student learning on the subject matter.
Instruction: Log in your reflections on the spaces provided following the prompts.
Submit a copy as a formative evaluation and retain a copy for you to compile as partial
requirement of the course.
Reflection Prompts Reflection Logs Remarks/
Suggestions

1. In this topic, I learned

that…………

2. The most useful thing in this

topic was…………………..

3. The main thing I want to find

out more about
is…………………….

4. I might have learned more

from this lessons
if……………
5. One thing when I am not
sure about.

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Module 3 Learn the different terms and their applications on monetary theories,
policies, crosses, models, and demand

TOPIC LEARNING OUTCOMES

At the end of this lesson, the students will be able to:

1. Understand the economic issues behind the conduct of monetary policy.

2. Analyze the proposals of the experts, legislators, government and the central
bank with respect to monetary policy consequences of their implementation.

Introduction

BSP has undertaken an aggressive monetary policy response to address the adverse
spillovers associated with the ongoing pandemic. With a manageable inflation
environment and stable inflation expectations, the Monetary Board sees enough policy
space for an assertive reduction in the policy rate to cushion the country's growth
momentum and uplift market confidence amid stronger headwinds. The monetary
policy easing is also aimed at ensuring adequate domestic liquidity and credit in the
financial system as well as lowering borrowing costs for affected firms and
households.

The BSP is prepared to use the full range of its monetary instruments and to deploy
monetary policy and regulatory relief measures as needed in fulfilment of its price and
financial stability objectives.

The BSP recognizes that the outbreak of COVID-19 has potential significant impact on
the operations of BSFIs in terms of risks related to exposures to borrowers and/or
industries or businesses severely disrupted or affected by the COVID-19 as well as
disruption in operations due to measures implemented to control the spread of virus
such as the lockdown situation, localized work suspension, and heightened health and
safety risks faced by BSFIs' employees and customers.

Moreover, the BSP has implemented extraordinary liquidity measures to complement

the National Government's broad-based health and fiscal programs in mitigating the
impact of COVID-19. These measures include the ₱300 billion repurchase agreement
with the BTr as well as launching a package of measures to support lending to micro,
small, and medium enterprises. Loans granted to MSMEs shall be counted as part of
banks' compliance with reserve requirements.

The BSP purchased billion Philippine pesos government bonds under a repurchase
agreement, which we can increase to billion pesos if necessary. BSP reduced the
reserve requirement ratio for banks; advanced the remittance of billion pesos of
dividends to the national government; and implemented regulatory relief measures
for banks and other BSP-supervised financial institutions. The goal is to reduce the
burden on households and businesses by ensuring sufficient domestic liquidity.

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The economy is expected to rebound in 2021 as the outbreak is contained, the economy
is further opened, and more government stimulus measures are implemented.
Downside risks next year include a slower than expected global recovery that could
weigh heavily on trade, investment, and overseas Filipino worker remittances.

The government is preparing an additional fiscal support package to be implemented

in September which is expected to include cash subsidies to poor households; support
for displaced workers and critically affected sectors such as agriculture, tourism, and
transportation; and relief to the health care system, among other measures. Such
measures will have high multiplier effects and keep the economy on track to recovery
next year.

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policies, crosses, models, and demand

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Module 3 Learn the different terms and their applications on monetary theories,
policies, crosses, models, and demand

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Paradigm Shift for a New Economy

The biggest constraint, however, to any progressive economic response to the

pandemic is the longstanding hegemony of neoliberalism that has resulted in the tragic
underdevelopment of and tremendous inequalities in the Philippines. From crony
capitalism during the Marcos dictatorship in the 1970s–1980s to the succeeding 30
years under different administrations with essentially elitist liberal-democratic
institutions, the neoliberalization process in the Philippines has favored the ideology
of trade liberalization over industrialization, localized agricultural innovation,
agroecological transformation and food self-sufficiency. Market-oriented reform
policies such as "eliminating price controls, deregulating capital markets, lowering
trade barriers" and reducing state influence in the economy, especially through
privatization and austerity

For decades, the country’s economic managers and free-market ideologues have
made Filipinos consent to the idea that it is much cheaper to import manufactured
goods, rice and other agricultural products than to protect and nurture the nation’s
manufacturing industry, agriculture, farmers and food system.

The macroeconomic techniques offered by MMT and Keynesianism may prove

effective for the Philippine government to keep the economy dynamic. But utilizing
them requires strict adherence to the principles of democracy and integrity in
governance.

On top of adopting the perspectives of state money, labor and democracy, there is need
to redefine the role and restructure the responsibilities of the central bank in a way
that contributes to a coordinated economic and social reform process—specifically to
strengthen the domestic industry, manage the terms of trade, and institutionalize
redistributive welfare programmes. To this end, “inflation targeting” should not be
BSP’s primary regulatory function and monetary policy goal. Though central bank’s
independence should be guaranteed, it must not be made immune from democratic
accountability.

It is particularly important in the wake of the pandemic that economic policies be used
as instruments of social justice to build conditions for a new economy, rather than the
recovery of the grossly unjust and highly unequal existing order. The synergy of
economic activities between rural and urban areas must be organized sustainably to
attain the geographical development objectives of dynamism with equity.
Importantly, to genuinely enforce progressive taxation, the government and the active

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citizenry have to collectively value every laborer’s contributions to the socio-economy,

reassess the ethics of inherited wealth, and dismantle rentier capitalism.

Indeed, the ongoing health, economic and existential crises ought to be taken as an
opportune moment to push for a shift in our thinking about the normative workings
of the economy, the significance of addressing systemic inequalities, and the moral
value of human dignity and every human life.

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Lets Do this again!

Case Analysis

The 2007–2009 Financial Crisis: An Erosion of Ethics: A Case Study

PAGE 34 MODULE

FORMAT

I-Facts of the Case

II- Point of View
III- Problems/ Objectives
IV- Areas of Consideration( SWOT ANALYSIS)
V- Courses of Action
VI- Conclusion
VII- Recommendation
VIII- References

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SCORING OF TOPICS ( USING ANALYTICS RUBRICS )

Standards
Criteria Fair (60-69%) Good (70-79%) Very Good (80- Excellent (90-
89%) 100%)

Knowledge of Demonstrates Demonstrates Demonstrates Demonstrates

forms, limited some knowledge considerable thorough and
conventions, knowledge of of forms, knowledge of insightful
terminology, and forms, conventions, forms, knowledge of
strategies relative conventions, terminology, and conventions, forms,
to the importance terminology, and strategies relative terminology, and conventions,
of sources to strategies relative to importance of strategies relative terminology, and
subject to importance of sources to subject to importance of strategies relative
sources to subject sources to subject to importance of
sources to subject

Critical and Uses critical and Uses critical and Uses critical and Uses critical and
creative thinking creative thinking creative thinking creative thinking creative thinking
skills skills with skills with skills with skills with a high
limited moderate considerable degree of
effectiveness effectiveness effectiveness effectiveness

Communication Communicates Communicates Communicates Communicates

of information information and information and information and information and
and idea idea with limited ideas with some ideas with ideas with a high
clarity clarity considerable degree of clarity
clarity and with
confidence

Quality of Argument is Argument takes Argument Argument is

argument and simple and on a fair and bridges on the complex and
presentation unoriginal, and expected complex and original, and the
the presentation position, and the original, and the presentation is
is weak and presentation is writing is clear strong, fluid, and
inconsistent moderately clear and coherent creatively
and coherent coherent

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SELF-EVALUATION

After reading the recommended references in the Warm-up Section, evaluate

yourself by placing a mark on the column that best describes your ability to
comprehend the concepts. There are no wrong answers in this section, so answer as
objectively as possible.

Usually Sometimes Seldom Never

3 2 1 0

I am able to grasp the open market

operation

I avoid confusing overnight policy

I learn the standing policy

I understand the non-standard fine

tuning

I learn that the outright purchases of

government securities.

I also learned that longer term

refinancing operation part of monetary
policy operations

TOTAL

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REFLECTION LOG
MONETARY POLICY AND FISCAL POLICY
Topic
Student Name_____________________________
Purpose: Student monitors their learning through reflection prompts. The log
documents growth and learning overtime in the student’s words. The log is used as
feedback on the topics being discussed and student learning on the subject matter.
Instruction: Log in your reflections on the spaces provided following the prompts.
Submit a copy as a formative evaluation and retain a copy for you to compile as partial
requirement of the course.
Reflection Prompts Reflection Logs Remarks/
Suggestions

1. In this topic, I learned

that…………

2. The most useful thing in this

topic was…………………..

3. The main thing I want to find

out more about
is…………………….

4. I might have learned more

from this lessons
if……………
5. One thing when I am not
sure about.

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TOPIC LEARNING OUTCOMES

At the end of this lesson, the students will be able to:

1. Appreciate the formulation of expectations and the important role of

economic decisions and policies.
2. Assess the effectiveness of implemented monetary policies including
international benchmarking.

Introduction

ASEAN, the pandemic has so far brought immediate disruptions in economic

activities across the region, as evident in the decline in tourism flows, disruption in air
travels, and weakening in consumer and business confidence, as several countries-
imposed lockdowns, community quarantines, stay-at-home order The supply chain
disruptions, travel restrictions, and lockdowns have had extensive consequences.
Many businesses reduced or temporarily closed operations, raising uncertainties and
concerns on corporate and household debt defaults.

Additionally, financial markets from the US to Asia and also Europe are volatile as
investors are concerned that the virus is creating a global economic and financial crisis
in ways not seen since the global financial crisis. The effect of the COVID-19 pandemic
on the financial system will depend on how much further the virus will spread across
the globe and its effect on economic activity, ii) fiscal and monetary policy responses
to the shock, and iii) regulatory measures to avoid from possible banking system
fragility. temporary business closures, and travel restrictions or prohibitions to contain
the virus.

Let’s take a visit other economies! Or Let’s take a look Economies of

Other Countries

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FISCAL AND MONETARY POLICIES IN ASEAN ECONOMIES

This appendix sets out the current monetary and fiscal policy arrangements of the ten
nations in the ASEAN region.

Brunei Darussalam. The exchange rate regime

in Brunei is a pegged exchange rate fixed at a
one-to-one parity with the Singapore dollar.
The Singapore dollar and Brunei dollar are
interchangeable currencies in both countries.
The currency is managed by the Brunei
Currency and Monetary Board although there are plans for a new monetary
authority. Brunei is an oil and gas exporting economy and 90% of government
revenue comes from the export of oil with the remainder made up mainly from
income tax. The main observed aim of the government is to control spending to
avoid inflation and to save much of the oil revenue. This is only an observed policy
as the government have not made any public statements about fiscal policy.

Cambodia. The kingdom of Cambodia has an

independent Central Bank (the National Bank of
Cambodia). The main aim of the Bank when
conducting monetary policy is to avoid
financing the fiscal deficit and to keep the
currency stable while allowing for changes
based on the movements of economic fundamentals. Monetary policy is
constrained by the fact that 95% of the currency in circulation is in US dollars. The
Central Bank is however currently looking at options to reverse the high level of
dollarization. The exchange rate regime amounts to a managed float where the
Central Bank intervenes in the currency market to prevent excessive volatility. The
main fiscal objective of the government is to enhance revenue collection to meet
priority needs while continuing to avoid a domestic deficit. The government uses
a fiscal revenue target to achieve its objective. The main source of revenue is
through trade taxes, although their importance has been declining since the
introduction of a Value Added Tax (VAT) in 1998. The government is currently
centralized but is going through a process of decentralization with the first local
elections being held in 2002. Oil is highly taxed in Cambodia with very limited
competition. Duty, excise tax and value added are all levied on an administrative
reference price set by the government. Indonesia Monetary Policy in Indonesia is
carried out by an independent central bank.

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Indonesia. The Bank’s main policy framework

is one of inflation targeting where the bank
aims to keep inflation between 7 and 9 percent.
It uses the Bank Indonesia reference rate,
which is the rate for a 1-month certificate of
deposit, as an intermediate target. The BI
reference rate is set monthly by the Bank’s
board. Fiscal policy is centered on the objective of achieving a balanced budget by
2007. This is done through a policy of prudent fiscal consolidation. A large part of
government revenues comes from exports of oil and gas although the government
also collects both income and value added taxes. The government shares the oil
and gas revenues with the local governments, each region is entitled to a 15 per
cent share of oil and a 30 per cent share of gas produced locally. Aceh and Papua
receive 70 per cent of their oil and gas revenues due to their autonomous status.
These local governments also collect a small amount of local taxes. ASEAN Fiscal
and Monetary Policy Responses to Rising Oil Prices 40 REPSF Project 06/004 Final
report. The oil price in Indonesia is heavily subsidized, the Indonesian price is
linked to the Singapore Gasoline benchmark but in 2004 Indonesian prices were
on average 27 per cent lower than those in Singapore. The government is however
currently committed to reducing those subsidies. After a series of modest increases
in petroleum prices over the past few years, President Yudhoyono announced a
sharp rollback of subsidies in September 2005. Prices of retail gasoline and diesel
rose by an average of 125 percent as a result. Despite this one-time move, fuel
consumption subsidies still take up a sizeable portion of government expenditures.
The Indonesian currency, the rupiah, is a floating rate set by the market with a
small amount of Central Bank intervention.

Lao People’s Democratic Republic (PDR)

Monetary policy in the Lao PDR is constrained
by the fact that an estimated 80 per cent of
currency in circulation is denominated in
foreign currency; the main currency in use is
the Thai baht although the US dollar and
Vietnamese dong are also common. The
country does have an independent Central
bank (Bank of Laos). The main policy aim is
containing inflation and the main anchor used is the Bank of Laos net domestic assets.
The country’s currency, the kip, is a managed float, with the central bank intervening
to smooth out some of the fluctuations. The Lao PDR has struggled with large
government deficits and the main short-term aim of the government is to contain
spending, especially on the government wage bill. In the longer term, the government
aims to enable Laos to meets its development needs within a fiscal framework.

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Taxation in Laos is complicated by the regional government system. Under this system
taxes are administered by the provinces. Each province is assigned revenue and
expenditure targets for the fiscal year. Provinces which run a surplus are expected to
remit it to the central government where as those which run a deficit can claim
reimbursement. This system is not very effective. As well as income, profits and sales
taxes, there are also a wide range of trade taxes in place. Oil imports are unlimited but
subject to tax, although the rates on diesel have recently been reduced to allow for
current high world oil prices.

Malaysia Monetary policy in Malaysia is

determined by the independent Central Bank,
Bank Negara Malaysia. The main policy
objective is to attain an appropriate balance
between maintaining price stability and
achieving the maximum sustainable level of
economic growth. The policy rate is the
Overnight Policy Rate (OPR). Bank Negara Malaysia has a monetary policy committee,
which meets eight times a year to discuss the economic and inflation outlook, and to
deliberate on the appropriate monetary policy decision. The responsibility for the
monetary policy stance lies solely with the Governor. In July 2005, Malaysia floated its
currency the ringgit, removing it from its peg against the US dollar. The Central Bank
only intervenes in the market to minimize volatility, and to ensure that the exchange
rate does not become fundamentally misaligned. The Government is currently
pursuing a policy of fiscal consolidation, with the fiscal deficit expected to decline to
3.4% in 2007 from 3.5% in 2006. The government is aiming to achieve this through
more aggressive tax collection, higher revenues from oil production and a reduction
in the fuel subsidy. Malaysia currently implements a fuel subsidy and tax concessions.

Myanmar Monetary policy in Myanmar is

undertaken by the Central Bank of Myanmar,
which is controlled by the Department of
Finance. Little is known about their policy
objectives or monetary policy tools but the Bank
does have a policy interest rate and also uses
open ASEAN Fiscal and Monetary Policy
Responses to Rising Oil Prices REPSF Project
06/004: Final report 41 market operations. The
currency is the Kyat which has an official exchange rate which is pegged to the US
dollar but there is widespread black-market trading. Foreign Exchange Certificates
(FECs) were introduced in 1993 to limit the coverage of the official exchange rate. The
certificates are issued by the Bank of Myanmar, issued in US dollars; they can then be
converted into Kyat at selected banks for a market rate. The government has struggled

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with a persistent budget deficit, which is largely due to the small tax base. Expenditure
cutting efforts have been made to try and reduce the size of the deficit.

Philippines The Philippines has an

independent Central bank, the Bangko Sentral
ng Pilipinas (BSP), which conducts monetary
policy under an inflation targeting framework.
For the year 2007, the headline inflation is
targeted at 4-5 percent. The BSP has a
Monetary Board, which meets every six weeks
to decide on the BSP’s monetary policy stance,
including adjustments in key policy rates, which are the repurchase rate and the
reverse repurchase rate, and other monetary instruments. The exchange rate is floating
with occasional scope for BSP’s participation to reduce excessive volatilities of the
exchange rate. Fiscal policy has gone through some radical changes since the new
administration came to power in 2004. A VAT reform has been undertaken with the
government’s ultimate objective to balance the budget by 2008 while significantly
increasing capital and social spending. The fiscal reform package includes measures
to enhance revenue administration and crackdown on tax evaders, privatization of
assets, and further rationalization of government expenditures. The Philippines
deregulated its downstream oil industry in 1998. In response to the high oil prices, oil
tariffs have been modified. An adjustment mechanism is in place where the tariffs on
oil and oil product imports are linked to the price of oil. The tariff (base rate of 3
percent) is automatically reduced or increased by 1 percentage point within a 0 to 3
percent range once the monthly average of Dubai crude falls above or below a certain
trigger level. The government continues to avoid costly fuel subsidies. One of the
major challenges faced by the BSP in 2006 was the risk of inflation rising due to the oil
price hikes. BSP’s efforts were focused on addressing the inflation risks and the
associated inflation expectations. Its priority stance was to steer inflation towards the
target. This required a careful assessment and understanding of the risks that impinge
on the inflation target. The Monetary Board maintained BSP’s policy rates steady
throughout 2006 on expectations of a manageable inflation outlook over the policy
horizon.

Singapore Singapore’s monetary policy is

conducted by the Monetary Authority of
Singapore (MAS) based on the management of a
trade-weighted exchange rate. The MAS allows
the exchange rate to fluctuate within bands, which
they do not disclose; neither do they disclose the
composition of the exchange rate. The monetary
policy and investment meeting are used to decide on monetary policy, although they
do not disclose the frequency of their meetings. Three policy options are available to

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them, they can either realign the central parity as a one-off; change the gradient of the
bands to allow for exchange rate appreciation or depreciation; or widen the band to
accommodate periods of volatility. The government has large fiscal reserves but has
to adhere to fiscal guidelines, which state that a government must have a balanced
budget over the election cycle and that each year, they may only use up to half of the
earnings from the fiscal reserve. Any surplus run by the government is transferred to
the fiscal reserves while any deficit can only be financed from them with the approval
of the President. The government currently has conflicting policy objectives. On the
one hand, they need to support the unemployed and low wage earners while on the
other they consider that fiscal reserves need to be increased to buffer against ASEAN
Fiscal and Monetary Policy Responses to Rising Oil Prices 42 REPSF Project 06/004
Final report the impacts to the economy of ageing as well as any external shocks or
threats to security. The medium-term objective of the government is therefore to
balance these two objectives. Singapore has a strict policy on cars, which means that it
has very low oil dependence; it has tariffs on oil imports as well as on the importation
of vehicles.

Thailand Monetary policy in Thailand has

evolved over time with the country having an
exchange rate peg up to 1997 and moving to a
floating rate following the Asian Crisis.
Thailand has an independent Central Bank,
the Bank of Thailand responsible for setting
and executing Monetary Policy. The Bank is
currently operating under an inflation
targeting framework with an inflationary target in a range of 0 to 3.5 per cent. The
Monetary Policy Committee meets every six weeks to deliberate on changes to the
Bank’s policy rate, the 14 day repurchase rate. The Bank of Thailand however
announced on the 13th of December 2006 that the policy rate will henceforth be the
one day repurchase rate. The exchange rate policy is a managed float of the Thai Baht,
where the value of the currency is predominantly determined by market forces with
intervention by the Central Bank only to prevent excessive volatility. The tax structure
in Thailand is highly centralized with the central government collecting and spending
a large proportion of taxes. The bulk of tax revenue comes from indirect taxation. The
Thai government has been able to turn the fiscal deficit from a deficit in 2002 to a
surplus today; in 2005, the government announced a large five-year investment
program of 2.5-5 per cent of GDP to be spent on infrastructure projects. The Thai
government briefly embarked on a fuel subsidization program in 2005 to combat rising
prices but this was scrapped after just nine months as the costs proved too large to
manage.

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Vietnam Monetary Policy in Vietnam is conducted by

the Country’s Central Bank (the State Bank of
Vietnam). The Bank is currently targeting a
deceleration of credit growth to 20 per cent by the end
of 2006. It achieves its aims mainly through the use of
two policy rates, the rediscount rate and the
refinancing rate. Officially, the State Bank of Vietnam
has a floating currency but it is in effect a De Facto peg against the US dollar. Vietnam
has very strict capital controls, which enable it to maintain the peg. The Vietnam
government has a fuel subsidy in place as although it is an oil exporter, it exports only
crude and imports all its refined products. The subsidies have been reduced
significantly over the last two years and the government has put in place a plan to
remove them entirely before 2008. The government has been maintaining a 2 per cent
fiscal deficit in recent years; this is despite strong revenues from the oil exporting
industry

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How Global Central Banks are Responding to

COVID-19

In a period of uncertainty, it’s time for authorities and regulators to step up. COVID-
19 has certainly developed into an unprecedented situation on a global scale — with
potentially bigger impacts even than the global financial crisis (GFC) that began in
2008/09. So, how have central banks responded?

When times get tough, central banks typically act as the first line of defense., modern
economies are incredibly complex—and calamities like the 2008 financial crisis have
already pushed traditional policy tools to their limits. In response, some central
banks have turned to newer, more unconventional strategies such as quantitative
easing and negative interest rates to do their work.

In response to the COVID-19 pandemic, central banks are once again taking decisive
action. To help us understand what’s being done, today’s infographic uses data from

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the International Monetary Fund (IMF) to compare the policy responses of 29

systemically important economies.

The Central Bank Toolkit

To begin, here are brief descriptions of each policy, which the IMF sorts into four
categories:

1. Monetary Policies
Policies designed to control the money supply and promote stable economic growth.

POLICY NAME INTENDED EFFECT

Policy rate cuts Stimulates economic activity by decreasing the cost

of borrowing

Central bank liquidity Provides distressed markets with additional

support liquidity, often in the form of loans

Central bank swap lines Agreements between the U.S. Fed and foreign
central banks to enhance the provision of U.S.
dollar liquidity
Central bank asset purchase Uses newly-created currency to buy large
schemes quantities of financial assets, supply and decreases
longer-term rates

2. External Policies
Policies designed to mitigate the effects of external economic shocks.

POLICY NAME INTENDED EFFECT

Foreign currency Stabilizes the national currency by intervening in

intervention the foreign exchange market

Capital flow measures Restrictions, such as tariffs and volume limits, on

the flow of foreign capital in and out of a country

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3. Financial Policies for Banks

Policies designed to support the banking system in times of distress.

POLICY NAME INTENDED EFFECT

Easing of the countercyclical A reduction in the amount of liquid assets

capital buffer required to protect banks against cyclical risks

Easing of systemic risk or A reduction in the amount of liquid assets

domestic capital buffer required to protect banks against unforeseen risks

Use of capital buffers Allows banks to use their capital buffers to

enhance relief measures
Use of liquidity buffers Allows banks to use their liquidity buffers to meet
unexpected cash flow needs

Allows banks to use their Allows banks to use their liquidity buffers to meet
liquidity buffers to meet unexpected cash flow needs
unexpected cash flow needs

4. Financial Policies for Borrowers

Policies designed to improve access to capital as well as provide relief for borrowers.

POLICY NAME INTENDED EFFECT

State loans or credit Ensures businesses of all sizes have adequate

guarantees access to capital

Restructuring of loan terms Provides borrowers with financial assistance by

or moratorium on payments altering terms or deferring payments

Putting Policies Into Practice

Let’s take a closer look at how these policy tools are being applied in the real world,
particularly in the context of how central banks are battling the effects of the COVID-
19 pandemic.

1. Monetary Policies
So far, many central banks have enacted expansionary monetary policies to boost
slowing economies throughout the pandemic.

One widely used tool has been policy rate cuts, or cuts to interest rates. The theory
behind rate cuts is relatively straightforward—a central bank places downward

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pressure on short-term interest rates, decreasing the overall cost of borrowing. This
ideally stimulates business investment and consumer spending.

If short-term rates are already near zero, reducing them further may have little to no
effect. For this reason, central banks have leaned on asset purchase
schemes (quantitative easing) to place downward pressure on longer-term rates. This
policy has been a cornerstone of the U.S. Federal Reserve’s (Fed) COVID-19 response,
in which newly-created currency is used to buy hundreds of billions of dollars of assets
such as government bonds. When the media says the Fed is “printing money”, this is
what they’re actually referring to.
2. External Policies
External policies were less relied upon by the systemically important central banks
covered in today’s graphic. That’s because foreign currency interventions, central
bank operations designed to influence exchange rates, are typically used by
developing economies only. This is likely due to the higher exchange rate volatility
experienced by these types of economies.

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CASE ANALYSIS ON

HYPERINFLATION

+CASES HYPERINFLATION.pdf

Format
I-Facts of the Case
II- Point of View
III- Problems/ Objectives
IV- Areas of Consideration( SWOT ANALYSIS)
V- Courses of Action
VI- Conclusion
VII- Recommendation
VIII- References

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SELF-EVALUATION

After reading the recommended references in the Warm-up Section, evaluate

yourself by placing a mark on the column that best describes your ability to
comprehend the concepts. There are no wrong answers in this section, so answer as
objectively as possible.

Usually Sometimes Seldom Never

3 2 1 0

I am able to grasp how the Central

Bank address the Covid 19 Pandemic.

I avoid confusing that allows banks to

use their liquidity buffers to meet
unexpected cash flow needs

I learn the used of Capital Buffers and

Liquidity Buffers

I understand the foreign currency

intervention.

I learn that the Central banks use

Policies designed to control the money
supply and promote stable economic
growth.

I also learned that Central banks use

Policies designed to support the
banking system in times of distress.

TOTAL

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SELF-EVALUATION

After reading the recommended references in the Warm-up Section, evaluate

yourself by placing a mark on the column that best describes your ability to
comprehend the concepts. There are no wrong answers in this section, so answer as
objectively as possible.

Usually Sometimes Seldom Never

3 2 1 0

I am able to grasp how the Central

Bank address the Covid 19 Pandemic.

I avoid confusing that allows banks

to use their liquidity buffers to meet
unexpected cash flow needs

I learn the used of Capital Buffers and

Liquidity Buffers

I understand the foreign currency

intervention.

I learn that the Central banks use

Policies designed to control the
money supply and promote stable
economic growth.

I also learned that Central banks use

Policies designed to support the
banking system in times of distress.

TOTAL

REFLECTION LOG

Monetary Policy and Central Banking Page | 51

Module 4 Understand how monetary policy carried out in major economies in
Asean Countries

MONETARY POLICY AND FISCAL POLICY

Topic
Student Name_____________________________
Purpose: Student monitors their learning through reflection prompts. The log documents
growth and learning overtime in the student’s words. The log is used as feedback on the topics
being discussed and student learning on the subject matter.
Instruction: Log in your reflections on the spaces provided following the prompts. Submit a
copy as a formative evaluation and retain a copy for you to compile as partial requirement of
the course.
Reflection Prompts Reflection Logs Remarks/ Suggestions

1. In this topic, I learned

that…………

2. The most useful thing

in this topic
was…………………..

3. The main thing I want

to find out more about
is…………………….

4. I might have learned

more from this lessons
if……………
5. One thing when I am
not sure about.

Monetary Policy and Central Banking Page | 52

Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

TOPIC LEARNING OUTCOMES

At the end of this lesson, the students will be able to:

1. Analyze the economic tools used in economic situation as a basis in

decision making.
2. Analyze the data of the monetary balance of payments (Covid 19
expenses)
Introduction

After a delayed response, central banks and monetary authorities in developed and
emerging market economies have engaged in an ongoing series of interventions in
financial markets and national governments have adopted an array of fiscal policy
initiatives to stimulate their economies. They focus on how tax policy can aid
governments in dealing with the COVID-19 crisis. The governments have taken
decisive action to contain and mitigate the spread of the virus and to limit the adverse
impacts on their citizens and their economies. Through various measures, countries
are helping businesses stay afloat, supporting households and helping preserve
employment. This readiness to act helps boost confidence. However, further action,
with broader and stronger measures, is needed. Policies will need to be adapted to the
evolving health and economic challenges. Containment measures may only be
removed gradually, so recovery may be uneven. Where recovery is weak, fiscal action
can strengthen it. In this context, multilateral collaboration will be vital for recovery
and to strengthen the global economy’s resilience to future shocks. The report finds
that specific support will be necessary for developing countries, including through
international coordination, financial support and adaptation of tax rules that benefit
all countries. Public finances will eventually need to be restored. All options should be
explored, including revamping old tools, introducing new ones, and bolstering
ongoing efforts to address the international tax challenges posed by the digitalization
of the economy.

What is inflation?

Inflation is a sustained rise in overall price levels. Moderate inflation is associated with
economic growth, while high inflation can signal an overheated economy. As an

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Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

economy grows, businesses and consumers spend more money on goods and services.
In the growth stage of an economic cycle, demand typically
outstrips the supply of goods, and producers can raise their prices. As a result, the rate
of inflation increases. If economic growth accelerates very rapidly, demand grows
even faster and producers raise prices continually. An upward price spiral, sometimes
called “runaway inflation” or “hyperinflation,” can result.
In the U.S., the inflation syndrome is often described as “too many dollars chasing too
few goods;” in other words, as spending outpaces the production of goods and
services, the supply of dollars in an economy exceeds the amount needed for financial
transactions. The result is that the purchasing power of a dollar declines.

In general, when economic growth begins to slow, demand eases and the supply of
goods increases relative to demand. At this point, the rate of inflation usually drops.
Such a period of falling inflation is known as disinflation. A prominent example of
disinflation in an economy was in Japan in the 1990s. This was driven by the sharp
slowdown in economic growth that followed the bursting of an asset price bubble.
Disinflation can also result from a concerted effort by government and policymakers
to control inflation; for example, for much of the 1990s, the U.S. enjoyed a long period
of disinflation even as economic growth remained resilient.

When prices actually fall, deflation has taken root. This occurred in Japan in 1995, from
1999 to 2003, and more recently from 2009 to 2012. Often the result of prolonged weak
demand, deflation can lead to recession and even depression.

How is inflation measured?

There are several regularly reported measures of inflation that investors can use to
track inflation. In the U.S., the Consumer Price Index (CPI), which reflects retail prices
of goods and services, including housing costs, transportation, and healthcare, is the
most widely followed indicator, although the Federal Reserve prefers to emphasize

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Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

the Personal Consumption Expenditures Price Index (PCE). This is because the PCE
covers a wider range of expenditures than the CPI. The official measure of inflation of
consumer prices in the UK is the Consumer Price Index (CPI), or the Harmonized
Index of Consumer Prices (HICP). In the eurozone, the main measure used is also
called the HICP.

When economists and central banks try to discern the rate of inflation, they generally
focus on “core inflation”, for example “core CPI” or “core PCE”. Unlike the “headline,”
or reported inflation, core inflation excludes food and energy prices, which are subject
to sharp, short-term price swings, and could therefore give a misleading picture of
long-term inflation trends.

What causes inflation?

Economists do not always agree on what spurs inflation at any given time, but in
general they bucket the factors into two different types: cost-push inflation and
demand-pull inflation.
Rising commodity prices are an example of cost-push inflation. They are perhaps the
most visible inflationary force because when commodities rise in price, the costs of
basic goods and services generally increase. Higher oil prices, in particular, can have
the most pervasive impact on an
economy. First, gasoline, or petrol, prices will rise. This, in turn, means that the prices
of all goods and services that are transported to their markets by truck, rail or ship will
also rise. At the same time, jet fuel prices go up, raising the prices of airline tickets and
air transport; heating oil prices also rise, hurting both consumers and businesses.

By causing price increases throughout an economy, rising oil prices take money out of
the pockets of consumers and businesses. Economists therefore view oil price hikes as
a “tax,” in effect, that can depress an already weak economy. Surges in oil prices were
followed by recessions or stagflation – a period of inflation combined with low growth
and high unemployment – in the 1970s.

In addition to oil, rising wages can also cause cost-push inflation, as can depreciation
in a country’s currency. As the currency depreciates, it becomes more expensive to
purchase imported goods - so costs rise - which puts upward pressure on prices
overall. Over the long term, currencies of countries with higher inflation rates tend to
depreciate relative to those with lower rates. Because inflation erodes the value of
investment returns over time, investors may shift their money to markets with lower
inflation rates.
Unlike cost-push inflation, demand-pull inflation occurs when aggregate demand in
an economy rises too quickly. This can occur if a central bank rapidly increases the
money supply without a corresponding increase in the production of goods and
service. Demand outstrips supply, leading to an increase in prices.

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Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

How can inflation be controlled?

Central banks, such as the U.S. Federal Reserve, European Central Bank (ECB), the
Bank of Japan (BoJ) or the Bank of England (BoE) attempt to control inflation by
regulating the pace of economic activity. They usually try to affect economic activity
by raising and lowering short-term interest rates.

Lowering short-term rates encourages banks to borrow from a central bank and from
each other, effectively increasing the money supply within the economy. Banks, in turn,
make more loans to businesses and consumers, which stimulates spending and overall
economic activity. As economic growth picks up, inflation generally increases. Raising
short-term rates has the opposite effect: it discourages borrowing, decreases the money
supply, dampens economic activity and subdues inflation.

Management of the money supply by central banks in their home regions is known as
monetary policy. Raising and lowering interest rates is the most common way of
implementing monetary policy. However, a central bank can also tighten or relax
banks’ reserve requirements. Banks must hold a percentage of their deposits with the
central bank or as cash on hand. Raising the reserve requirements restricts banks’
lending capacity, thus slowing economic activity, while easing reserve requirements
generally stimulates economic activity.

A government at times will attempt to fight inflation through fiscal policy. Although
not all economists agree on the efficacy of fiscal policy, the government can attempt to
fight inflation by raising taxes or reducing spending, thereby putting a damper on
economic activity; conversely, it can combat deflation with tax cuts and increased
spending designed to stimulate economic activity.

How does inflation affect investment returns?

Inflation poses a “stealth” threat to investors because it chips away at real savings and
investment returns. Most investors aim to increase their long-term purchasing power.
Inflation puts this goal at risk because investment returns must first keep up with the
rate of inflation in order to increase real purchasing power. For example, an
investment that returns 2% before inflation in an environment of 3% inflation will
actually produce a negative return (−1%) when adjusted for inflation.

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Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

If investors do not protect their portfolios, inflation can be harmful to fixed income
returns, in particular. Many investors buy fixed income securities because they want a
stable income stream, which comes in the form of interest, or coupon, payments.
However, because the rate of interest, or coupon, on most fixed income securities
remains the same until maturity, the purchasing power of the interest payments
declines as inflation rises.

In much the same way, rising inflation erodes the value of the principal on fixed
income securities. Suppose an investor buys a five-year bond with a principal value of
$100. If the rate of inflation is 3% annually, the value of the principal adjusted for
inflation will sink to about $83 over the five-year term of the bond.

Because of inflation’s impact, the interest rate on a fixed income security can be
expressed in two ways:
• The nominal, or stated, interest rate is the rate of interest on a bond without any
adjustment for inflation. The nominal interest rate reflects two factors: the rate of
interest that would prevail if inflation were zero (the real rate of interest, below),
and the expected rate of inflation, which shows that investors demand to be
compensated for the loss of return due to inflation. Most economists believe that
nominal interest rates reflect the market’s expectations for inflation: Rising
nominal interest rates indicate that inflation is expected to climb, while falling
rates indicate that inflation is expected to drop.

The real interest rate on an asset is the nominal rate minus the rate of inflation. Because
it takes inflation into account, the real interest rate is more indicative of the growth in
the investor’s purchasing power. If a bond has a nominal interest rate of 5% and
inflation is 2%, the real interest rate is 3%.

Unlike bonds, some assets rise in price as inflation rises. Price rises can sometimes
offset the negative impact of inflation:
• Equities have often been a good investment relative to inflation over the very long
term, because companies can raise prices for their products when their costs
increase in an inflationary environment. Higher prices may translate into higher
earnings. However, over shorter time periods, stocks have often shown a negative
correlation to inflation and can be especially hurt by unexpected inflation. When
inflation rises suddenly or unexpectedly, it can heighten uncertainty about the
economy, leading to lower earnings forecasts for companies and lower equity
prices.

Prices for commodities generally rise with inflation. Commodity futures, which reflect
expected prices in the future, might therefore react positively to an upward change in
expected inflation.

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Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

How can i help protect my fixed income portfolio from inflation?

To combat the negative impact of inflation, returns on some types of fixed income
securities are linked to changes in inflation:
• Inflation-linked bonds issued by many governments are explicitly tied to changes
in inflation. In the 1980s, the U.K. was the first developed country to introduce
“linkers” to the market. Several other countries followed, including Australia,
Canada, Mexico and Sweden. In 1997, the U.S. introduced Treasury Inflation-
Protected Securities (TIPS), now the largest component of the global ILB market.

Floating-rate notes offer coupons that rise and fall with key interest rates. The interest
rate on a floating-rate security is reset periodically to reflect changes in a base interest
rate index, such as the London Interbank Offered Rate (LIBOR). Floating-rate notes
have therefore been positively, though imperfectly, correlated with inflation. Many
commodity-related assets can also help cushion a portfolio against the impact of
inflation because their total returns usually rise in an inflationary environment.
However, some commodity-based investments are influenced by factors other than
commodity prices. Oil stocks, for example, can fluctuate based on company-specific
issues and therefore oil stock prices and oil prices are not always aligned.

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Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

Let’s do this again !

ESSAY

1. What is the impact of the current oil price shock on ASEAN countries?
In particular:

2. What impact do the rising oil prices have in the short and long terms?
3. What are the key transmission mechanisms of an oil price shock to
ASEAN economies and what are the direct and indirect effects?
Secondly,

4. What are the appropriate fiscal and monetary policy responses to that
shock? For example: • How have policies reacted in the past and how
effective have the responses been?

5. How should monetary and fiscal policies in ASEAN economies best

respond to these oil price fluctuations and a sustained increase in oil
prices?

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Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

Case Analysis:

CASE OF CRYPTO CURRENCY

FORMAT
I-Facts of the Case
II- Point of View
III- Problems/ Objectives
IV- Areas of Consideration( SWOT ANALYSIS)
V- Courses of Action
VI- Conclusion
VII- Recommendation
VIII- References

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Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

SELF-EVALUATION

After reading the recommended references in the Warm-up Section, evaluate yourself
by placing a mark on the column that best describes your ability to comprehend the
concepts. There are no wrong answers in this section, so answer as objectively as
possible.

Usually Sometimes Seldom Never

3 2 1 0

I am able to grasp that when economic

growth begins to slow, demand eases
and the supply of goods increases
relative to demand

I avoid confusing that heating oil

prices also rise, hurting both
consumers and businesses.

I learn the Moderate inflation is

associated with economic growth,
while high inflation can signal an
overheated economy

I understand that the Inflation-linked

bonds issued by many governments
are explicitly tied to changes in
inflation

I learn that the Many commodity-

related assets can also help cushion a
portfolio against the impact of inflation
because their total returns usually rise
in an inflationary environment

I also learned that oil, rising wages can

also cause cost-push inflation, as can
depreciation in a country’s currency

TOTAL

Monetary Policy and Central Banking Page | 61

Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

SELF-EVALUATION

After reading the recommended references in the Warm-up Section, evaluate yourself by
placing a mark on the column that best describes your ability to comprehend the concepts. There
are no wrong answers in this section, so answer as objectively as possible.

Usually Sometimes Seldom Never

3 2 1 0

I am able to grasp that when economic growth

begins to slow, demand eases and the supply of
goods increases relative to demand

I avoid confusing that heating oil prices also

rise, hurting both consumers and businesses.

I learn the Moderate inflation is associated with

economic growth, while high inflation can
signal an overheated economy

I understand that the Inflation-linked bonds

issued by many governments are explicitly tied
to changes in inflation

I learn that the Many commodity-related assets

can also help cushion a portfolio against the
impact of inflation because their total returns
usually rise in an inflationary environment

I also learned that oil, rising wages can also

cause cost-push inflation, as can depreciation in
a country’s currency

TOTAL

Monetary Policy and Central Banking Page | 62

Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

REFLECTION LOG
MONETARY POLICY AND FISCAL POLICY
Topic
Student Name_____________________________
Purpose: Student monitors their learning through reflection prompts. The log documents growth and
learning overtime in the student’s words. The log is used as feedback on the topics being discussed and
student learning on the subject matter.
Instruction: Log in your reflections on the spaces provided following the prompts. Submit a copy as a
formative evaluation and retain a copy for you to compile as partial requirement of the course.

Reflection Prompts Reflection Logs Remarks/ Suggestions

1. In this topic, I learned

that…………

2. The most useful thing

in this topic
was…………………..

3. The main thing I want

to find out more about
is…………………….

4. I might have learned

more from this lessons
if……………
5. One thing when I am
not sure about.

Monetary Policy and Central Banking Page | 63

Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

POTENTIAL ANALYSIS AND DECISION MAKING

Identify Economic Problems encountered in our country during Pandemic

Potemtial Seriousness Causes Effect Preventive Contingent Responsible Time

Problems High, Measures Action Frame
Medium,
Low

10

2.FISHBONE ANALYSIS

1. Manpower

2. Money

3. Machine

4. Materials

5. Moments

6. Methods

7. Environment

Monetary Policy and Central Banking Page | 64

 MACHINE
MATERIAL METHOD
Module 5

Closely
Monitor the
Program
without
Follow up the
COPC

Monetary Policy and Central Banking

approval of
during the time of inflation

the certificate
of compliance

Enhance
Sense of
Urgency to
apply the
certificate of
Compliance

MEASUREM MANPOWER

Page | 65
Develop appropriate values like consideration and understanding

ENT
ENVIRONME
NT
Module 5 Develop appropriate values like consideration and understanding
during the time of inflation

REFLECT ON YOUR PERFORMANCE

What were your misconceptions about What new or additional learning have
the topic prior to taking up this lesson? you had after taking up this lesson in
terms of skills, content and attitude?

I thought… I learned that…

Monetary Policy and Central Banking Page | 66