What is the connection between monetary policy and the financial crisis?

The relationship between monetary policy and the financial crisis is related to the way monetary policies are used in a period of financial crisis. The application of monetary policy depends on the country, the ideology of monetary policy creators, unique circumstances surrounding the crisis, and the goal that financial policies seek to achieve. In other words, there is no single response to the financial crisis through the application of monetary policy, because different countries can use different monetary policies in a similar financial crisis.

The first assessment when looking at the link between monetary policy and the financial crisis is to identify the exact type of financial crisis that the country considered. Assuming that the financial crisis is in the form of an economic bust or recession, the country can use monetary policies aimed at reviving the economy from the slump it faces. When the recession faces a general reaction of monetary policy creators, usually the country's central banks will reduce interest rates with the hope that such a measure will facilitate pressure on consumersa dominant decline in the economy.

For example, a reduction in interest rates will make it easier for people to obtain a loan and other forms of funding for different purposes. Easier access to money can encourage people to spend more, which would lead to greater demand for finished products and other consumer materials. If this is the case, companies will be encouraged to produce more, and the increase in financial activities will serve as a much needed impact of the economy. This shows the connection between monetary policy and the financial crisis. If this type of monetary policy is applied, it is described in economics as an effort to expand the economy.

In the same way as the policy monetry can be used to cause expansion in the economy, it can also be applied to the opposite effect. This means that monetary policy can be used to make the economy. This is another connection between monetary policy and financial crisis becauseThis method can also be used as a solution to the financial crisis. If monetary policy creators are to cause contraction in the economy, it can raise interest rates in order to achieve the desired result to resolve the financial crisis.