To what extent is Blanche portrayed as unstable? To what extent is she misunderstood?

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Though the first question you asks takes a more critical look at Blanche and the latter a more compassionate perspective, both "unstable" and "misunderstood" are accurate words to describe her character.

When we first meet Blanche, her lies to Stella and Stanley are clearly just falsehoods she tells intentionally to keep up appearances. She knows that she needs to put on an act to appear delicate, prudish, and a bit stuck-up in order to attract the right type of man. She still sees herself as a Southern belle who can win stability through a good marriage and she knows she will never win the type of husband she is looking for (the chivalrous but long-lost Shep Huntleigh as an example) without these specific qualities. However, it is just these qualities that drive Stanley (and many audiences) away from Blanche, as her snobbish airs and affected lies increase our irritation and disdain for her. She can be said to be misunderstood because she is surviving in the best way she knows how, regardless of how much it turns people against her. In fact, Blanche has always been misunderstood, as Stella says to Stanley:

"You didn’t know Blanche as a girl. Nobody, nobody was tender and trusting as she was. But people like you abused her, and forced her to change.”

In this way, Blanche can be seen as the misunderstood victim of circumstance.

It is also true, however, that Blanche is unstable. Still caught up in the illusion of the antebellum South, displaced in both place and time, her approach to rescuing herself and Stella is completely off. This problem, paired with the way her past haunts her, causes her to slowly lose her sense of what is reality and what is fantasy. In fact, it seems she prefers the fantasy. After all, Belle Reve, the name of the family's plantation, names "beautiful dream" in French. Additionally, Blanche tells Mitch:

"I don’t want realism, I want magic! [..] Yes, yes, magic! I try to give that to people. I misrepresent things to them. I don’t tell the truth, I tell what ought to be truth. And if that is sinful, then let me be damned for it!”

Pair this declaration with the other suggestions of Blanche's instability – the haunting polka music and gunshot that only she can hear, the shadows on the wall, the echoing voices – and it's clear that even though it seems that she is just trying to make the world a better place, she is also haunted by the deaths of her family and husband, and of the choices and acts she has engaged in to survive.

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