Question

Money can perform its function properly only when its own value remains stable. Discuss

Answer 1

Money or a currency of any country should be stable in value. Stability in value implies that the said currency maintains a specific exchange rate or purchasing power.  Prolonged inflation causes money to lose its power and hence its purchasing power as the price of commodities and services skyrocket. Deflation, on the other hand, leads to the decrease in prices of goods and services causing the money to increase in value. An extreme case of both cases is highly negative as rapid inflation slows economic growth since it reduces the value of savings.  Lenders suffer losses as the value of money borrowers repay less than the expected value agreed at onset.  Conversely, while people might celebrate deflation, reducing prices of commodities pushes companies and supplies to postpone investment or hoard products causing an artificial shortage. The act of postponing investment may force companies to lay off some employees as they seek to contain losses. At the same time, borrowers find it difficult to settle their loans as the value of the amount repaid increases, which is a threat to lending institutions as the defaulting rate also increases. All in all, the simple reason why we need a stable currency is that it is very easy and extremely efficient to trade on a stable currency. Production increases, more jobs created, and hence more wealth is generated.