Monetary Policy for Global Financial Crisis Assignment

Monetary Policy for Global Financial Crisis - Assignment Example The world’s drastic encounter with the Global Financial Crisis saw the demise of many financial institutions which later translated to the proclamation for steady measures to sustain many of the world’s economies. The disaster translated to a down turn in many stock markets, intrinsic topple of economies alongside a decline in all aspects of money dependent sectors of the world as a whole. The cause in the occurrence of the event was the decline in value in prime property and translating into monetary liquidity problems in the United States’ banking sector (Bordo & Michael, 2008, 17). A trace of the financial crisis takes us back to the end of 2007, when many of the securities held by banks in the United States devalued, perpetually leading to the same for the banking sectors all over the world. Background Information Characteristic of the crisis was the liquidity of banks in rendering services to their customers as their solvency had been vastly affected; leadin g to a very low capability to lend to customers and investors could therefore not be in a position to accomplish prospected development. The global financial crisis of 2008 was labeled the worst financial disaster since 1930’s Great Depression. It led to many adverse effects worldwide, even to the individuals who suffered mainly evictions from rental houses and evictions from mortgaged houses. Banks in the United States alone lost over a trillion dollars from dealing with toxic assets, many suffering closure and others having to lend from larger banks. The unexpected decline in the value of the world’s assets hit many banking institutions with a big bang, while many who had extended mortgages and other monetary loans could not sustain themselves with the low levels of liquidity which they encountered. The perpetual increase in the spread of the effects of the financial crisis saw other countries experiencing difficulties in sustaining their economies, much specifically those that committed much of their economy’s dominance in the western countries such as India and China. The drastic effects on the general macroeconomics of all the world’s effects of the global financial crisis obliged major monetary policy developments in economies, in an effort to protect their growth from dropping as well as the protect the individual from suffering the effects of the same. Governments had to strategize responses to protect themselves as well as device long term strategies to ensure the same does not happen to them (Gali, 2008, 165). Monetary Policies: Monetary Aggregate The purpose of the monetary aggregate policy is to increase the amount of physical money in circulation. It works towards increasing the amounts in the public so that enough of it is circulating. The effect of having a lot of circulating money is defined in many ways and it requires great scrutiny from economists. The quantity theory of money is a clear definition of the effects of applying the money aggregate monetary policy (Kenneth, R., 1985, 1175). In essence, fighting a financial crisis seeks to maximize the amount of money that is in circulation. According to the quantity theory