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Why do you think price stability is such an important macroeconomic goal? Discuss the consequences of...

Why do you think price stability is such an important macroeconomic goal? Discuss the consequences of inflation giving examples.

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Price stability means there must be minimum price fluctuations. it infuses a sense of confidence in investors. Further, generally, the public also develops faith in the economic system in the country. it is also considered as a precondition for the political and social stability of any country.

But side by side, it is also true that we can not focus on price stability all the time. During the economic recession, our concern is employments and output. The government might give up the objective of price stability for some time and seeks to drive up the economy through inflationary actions.

Further, some rise in inflation is good for the economy and investors, it increases profits margins and incentivizes investors. But high rate of inflation hurts the fixed income group severely and they even might slip into the abject poverty colossal.

To sum up, there must be a right balance between price stability and economic growth. Inflation can be faced during the economic downturn to drive up the economy. But once the economy is at full employment, the central bank and government must align its policies with objective price stability.

For Example during the financial crisis of 2007-2008, both Federal Government and Federal Reserve were concerned about the employments and output only. They kept the issue of price stability in backburner for quite some times. Fed reduces the interest rates through the series of actions. Further after when economy recovered considerably, there was rise in concern of Fed towards the price stability. Fed is a bit more aggressive on policy rates now or raising the interest rates.

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