money, banking. Explain that the cost of each of the following condition and explain who bears them. A. Interest rate instability B. Exchange rate instability C. Inflation D. Unstable growth
Exchange rate instability causes money to rise and fall in value compared to other currencies. We are seeing this in the United States right now; our dollar is worth less than the Canadian dollar, the Euro, and the British pound, and it is only worth more than the Japanese Yen because the yen is traditionally a small amount. The Swiss Franc is rising because their economy is more stable. With daily-changing exchange rate instability, it is easy for investments to grow worthless and local businesses to lose revenues; trading often cannot keep up with the changes.
One of the things that people are worried about is inflation. Many people believe that the governments of the world are printing too much money and that in time there will be inflation. If this happens, those who hold cash will get hurt the most, as paper money will be worth little. This is one of the reasons why people are investing in gold and and other precious metals. In a word, in view of inflation people are trying to invest in real assets.
The costs of interest rate instability, exchange rate instability, inflation and unstable growth are borne by everyone in the economy except perhaps a small group of people that are involved in speculation to make profits from the instability of interest rates and exchange rates. It should be mentioned that the foreign exchange market is the largest in terms of volume and exists to a large part due to exchange rate instability.
Inflation can be incredibly damaging to an economy, as anyone familiar (say) with the history of Germany in the 1920s can say. Anyone who remembers the late 1970s in the U. S. will also be inclined to take the risk of inflation very seriously. The damage caused by inflation is not only economic but can also greatly affect the national psyche.
Costs of inflation are borne by lenders and people on fixed incomes. These are the people who are negatively impacted by inflation. Lenders get lower real rates of return on their loans. People with fixed incomes experience a loss of buying power. In these ways, they are hurt by inflation.
Unstable growth is something that can damage everybody. All of us can pay the price for a period of unstable growth, as it is normally marked by rapid economic growth that is followed by an even quicker period of economic decline. This is known as the boom and bust scenario.
Unstable growth assumes that the growth is unmanageable or unsustainable, or if it seems to be. If the growth only seems unstable but turns out to be stable and sustainable, that would be a much better scenario for everyone involved.