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Role of the Financial Market


It is the role of the financial market to ensure that funds are channeled from the government to those who have a shortage of funds and may wish to spend more than they earn. The book, The Economics of Money, Banking, and Financial Markets by Frederic Mishkin, illustrates how financial markets and banking services directly affects the economic stability of a country. Chapter thirteen of the book, central banking and monetary policies, is the chapter of choice because it effectively illustrates the role central banks play in the development of the financial sectors and economic stability. The onset of the coronavirus pandemic affected the banking sector and the world’s economy. Chapter thirteen highlights how the central bank can enact management strategies and monetary policy to reduce the impact of a crisis such as the coronavirus pandemic on the business community.

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Relationship Between Central Banking and Current Events

The chapter begins by citing how the subprime crisis significantly affected the economic stability of Canada and how the central bank came to the rescue. Mishkin argues that the central bank implemented large liquidity injections into the credit markets in trying to get them to lend again. Also, the chapter depicts how the supply of money affects interest rates and the overall economic stability of a country. The various tools and strategies used by banks are shown in the chapter. Furthermore, the chapter cites the role of the central banks as the federal government’s fiscal agent that provides debt management services. The central banks also serve as the lenders of last resort where business faces a liquidity crisis. Finally, the chapter outlines the relationship between the Federal Reserve System entities and the policies of the Fed. With the knowledge of the central bank’s operation and its overall structure, a business entity can easily derive strategies to help maneuver the pandemic period. From the chapter, it is evident that central banks have a huge influence on the economy and can easily enact laws such as cash currency and risk management in trying to mitigate the pandemic.

Relation Between Monetary Policies and Current Events

Conversely, the chapter shows that monetary policies significantly influence the interest rates and economic stability of a country. The central bank has an increased focus on the interest rate charged on overnight loans of reserves from one banking service to another as the primary instrument of monetary policies (Mishkin 450). Furthermore, the policies majorly affect open market operations, settlement balance management, and banks’ lending ability (Mishkin 472). Besides, the chapter outlines the framework for implementing the monetary policy (Mishkin 460). The chapter effectively gives a comparison between demand and supply curves in the economy and how they are affected by the government monetary policies (Mishkin 470). With a proper understanding of the open market operation policies, one can decide on whether to start or close a business, especially during the pandemic. Laws such as purchase and resale agreements can be used to relieve undesirable upward pressure on the overnight interest rate during the pandemic.


The central bank has a risk management framework that allows it to identify, report, mitigate, and even analyze the risks of a crisis. The chapter highlights how the central banks’ strategies and monetary policies can be implemented to respond to the crisis caused by the coronavirus pandemic. Besides, the structures within the central banks allow for business continuity plans which firms can take advantage of during the pandemic. The chapter’s in-depth knowledge on central banks and monitory policies, if well implemented, can improve a countries’ economic stability and significantly reduce inflation.

Work Cited

Mishkin, Frederic S. The Economics of Money, Banking and Financial Markets. 12th ed., Pearson, 2019.

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