Monetary Policy Analysis

Monetary Policy Analysis

Everyone wants to make an investment. Investments are made with the purpose to profit from one's original value. The way that profits are made through investments is through the percentage of interest offered in which one is investing. In the article "How to assess investments with time value of money", the author L. Neal Freeman emphasizes, the "time value of money". This is known to be one of the basic principles of finance, for with the concept of the time value of money, today's dollar will be worth more that a dollar received in the future. (Freeman, 2000) The monetary policy affect's ones investments, for when investing one's money it is important the understand the time value, define the value, and understand the capital budgeting so that one would be able to decide whether or not the investment should be made.

When investing one's money, it is important to define the present and future value. The present value is the worth of today's dollar, and the future value is the worth of the sum projected in the future. As one defines the future value, he or she will have to determine the amount of interest being made. If the investment entails interest compounding, then "interest is assumed to be calculated not only on principal, but also on all previously accumulated interest." (Freeman, 2000)

Deciding to invest in something is a difficult decision. Many "businesses use capital budgeting to decided whether an investment should be made in particular fixed assets." (Freeman, 2000) When using the technique of capital budgeting, one way to approach it is by using the net present value. In order to practice the net present value technique, one must know what the initial cash outlay will be, the cash flow must be estimated, and the discount rate should be chosen. With all those figures, one will be able to compare "all the after-tax cash flows associated with the investment, with the initial cash outlay to determine if the initial cash outlay is justified." (Freeman, 2000) If the sum of the present value were much less than the initial cash outlay, then one would be able to conclude the less worth of the investment and decide to not invest.

With the approach and techniques of capital budgeting, one can also relate it to the effects of monetary policy on the trade balance. For "when a country's international trade balance is negative (in deficit), the country is importing more than it is exporting. When a country's international trade balance is positive (in surplus), the country is exporting more than it is importing." (Colander, 2004) This is evident in the way that monetary policies affect trade balances generally though income.

There are a couple of ways that the income may be affected. Expansionary monetary policies increase one's income. For as the income