Is it desirable that the macroeconomy should be stable and if so why - Essay Example

Is it desirable that the macroeconomy should be stable and if so why? A stable macroeconomy refers to an economy where the rate of unemployment, inflation, and growth are unwavering. This paper, based on several factors, argues that it is desirable that the macroeconomy should be stable. Low inflation One of the reasons why it is desirable for the macroeconomy to be stable is that it maintains a stably low inflation rate that encourages more investment. An unwavering low inflation leaves consumers with money they can invest in initiatives that build capital and therefore improves productivity.

As it encourages investment and improved productivity, it encourages non-price competitiveness in the country. The non-price competitiveness results from people having to engage in other investment opportunity due to the confidence they have in the macroeconomy.1 Low national debt A stable macroeconomy is also desirable because it helps maintain stable and low national debt. Low national debt allows the government the flexibility to invest its revenue in addressing the needs of its population and not using it to foreign creditors.

One of the needs of the population is employment and the government can concentrate on creating jobs, hence reducing the unemployment rate.2 It has been noted that a reduction in the rate of unemployment leads to a subsequent increase in the gross domestic product. A stably low national debt also allows the government to adopt fiscal policies that are a bit lenient during crises. Maintenance of a low national debt also helps maintain low deficits because the government saves on income revenue that would have gone to paying debts.

3 Currency stability A stable macroeconomy is desirable because it encourages currency stability. In a stable macroeconomy, the amount of the currency exported out of a country offsets the currency imported into the country. This creates a single price for investment and trade that is dependent on this balance of trade.4 When a balance of trade is achieved, the investment currency gets in and out of a country without affecting the value of a country’s currency adversely. This has the advantage of reducing the chances of investors influencing exchange-rate risks.

At the national accounting level, currency stability reduces the peril involved with foreign debt.5 Low long-term interest rates The action of a stable macroeconomy in maintaining stably low inflation leads to the maintenance of low long-term interest rates. This reduces debt-servicing costs that people with businesses loans and mortgages pay.6 Borrowers will be attracted to take more loans and mortgages when they expect stable future inflation rate. However, high long-term rates can make borrowers anticipate high inflation in the future and as such a stable macroeconomy calls upon the government to keep long-term interest rates low.

7 In conclusion, the macroeconomy should be stable because it helps keep the inflation rate stably low. This helps raise the level of investment. A stable macroeconomy helps reduce the national debt thus allowing the government to address problems such as unemployment. It also helps stabilize the currency and maintain low long-term interest rates. Reference list Aryeetey, Ernest, Macroeconomic Stability. Legon: Woeli Publication Services, 2004. Bhaghavati. Jagadisa. In Defense of Globalization.

New York: Oxford University Press, 2004. Ho, Lok-sang. Exchange rate regimes and macroeconomic stability. Boston: Kluwer Acad. Publications, 2003. Jadresic, Esteban. Wage Indexation and Macroeconomic Stability The Gray-Fischer Theorem Revisted. Washington, DC.: International Monetary Fund, 2005. Montiel, Peter. Macroeconomics in emerging markets. Cambridge: Cambridge University Press, 2003. Selassie, Abebe. Beyond Macroeconomic Stability. Washington: International Monetary Fund, 2008. Stiglitz, Joseph.

Stability with growth: macroeconomics, liberalization and development. Oxford: Oxford University Press, 2006. References