Saturday, August 22, 2009
The general rise in the level of prices represents inflation, while the general fall in the level of prices is called deflation. Both these situations are undesirable. Therefore monetary policy is used to stablize the prices. Because of the price stability.
(1) The negative effects rising in an economy will come to an end.
(2) The price stability will not allow the depression or boom to occur.
(3) The future value of money can easily be assessed, and everybody will accept it for future payments without any hesitation.
(4) The price stability will not encourage unequal income distribution.
(5) Because of the price stability the rising prices during inflation and falling prices industry deflation could be controlled.
(6) The Stable prices lead to stagnation in the economy. As if producers and labour not possessing the incentives in the form of more profits and wages their efficiency will be affected.
(7) Because of the changes in price level the resources allocation, investment, direction and choice of technique like issues are easily resolved.
(8) Because of the constant price level the fixed income group would develop the realization that their wages, pensions, rents and interest etc will remain the same. When their incomes do not increase they will fail to avail the luxuries of life.
(9) The price stability is not possible because monetary policy can not encompass the whole economy. The monetary policy can maximally influence the activities of commercial banks. The non-bank financial institutions and foreign bans have their own policies which are hardly influenced by the changes in monetary policy.
Keeping above given points in for and against the price stability in view it can be concluded that it is not possible practically that the prices could remain stable or constant at a particular level. Therefore economists think that the monetary policy be devised in such a way that the rising prices and falling prices both should remain under control. It means that neither the pries should rise very sharply nor should fall very rapidly.
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