Monetary Policy And The Financial Crisis - 1583 Words

The financial crisis in the early 2000’s has raised questions on the linkage between the monetary policy and the financial markets. This document will analyze the impact of a country’s net balance of payments on the exchange rate of the country’s currency. An analysis of the impact of a country’s net level of interest rates and nominal inflation rate on the country’s exchanged rate will also be reviewed. In addition, a review of the growth in a country’s Gross National Product will be analyzed to determine if there is any relationship to a country’s trade deficits. Finally, a recommendation will be presented on how monetary policies could be employed in the future. Monetary Policy A model developed by Robert Mundell and Marcus Fleming†¦show more content†¦560). The second market in the model is the money market of that country. The demand of money for a nation depends on the value of the gross domestic products and the prices of those products. On the other hand, the supply of money is influenced by the monetary policy. The Monetary policy is defined as â€Å"the set of central-bank rules, regulations, and actions that determine the availability of bank deposits and currency in circulation, and is the top influence on money supply† (Pugel, 2012, p. 562). In addition to interest rates and the product’s a country produces, a nation’s supply and demand of money can be swayed by exogenous focuses. The third market is the foreign exchange market or balance of payments. This is where the availability of foreign currency is balanced against the demand for it (Pugel, 2012, p. 564). The term foreign exchange market is used when referring to the exchange rate and the term balance of payment is used when referring to the country’s settlements balance. When understanding the balance of goods and services that are traded by a country, it is reliant in a negative manner on the imports needed to produce the products. Also, the flow of money in the international market is depending on interest rates from all nations and can be positively or negatively affected dependent on how high or low these rates are by nation. When investors are looking to increase their financial position, country’s offering higher