Why is a stable money supply important?

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Ashley Kannan eNotes educator| Certified Educator

A stable money supply is important because it helps to limit wide fluctuations in economic activity.  Capitalism is understood as a form of economic endeavor in which there will be cyclical patterns of expansion and contraction, "boom" and "bust."  A stable money supply and streams to generate it enables financial organizations to experience growth and endure contraction in a steady manner that does not experience intense disruption through fluctuation. Thinkers like Friedman argue that to function well, "stable business policy must offset random disturbances to economic activity"  A steady and stable money supply allows this to happen.  

Nations that practice discretionary economic policy without the harvesting and refining of a stable money policy risk intense shifts in profit streams.  In the market setting, fluctuations are inevitable. It is for this reason that a stable money supply becomes important. For example, China is currently at an all time low in factory production.  A stable money supply would enable Chinese factories to endure this particular period of business slowdown.  Unstable money supply would place all of its emphasis in factory production.  In a period of boom, this is a good idea, but it is a discretionary policy approach, which, as can be seen during periods of slowdown, is not the best idea.  Stable money supply is represented with assets that can be easily accessed and are present in real time, as opposed to hopeful projection.  

In a globalized economy, where each nations' interests are essentially linked to another, a stable money supply is essential for economic viability.  Economists in places such as India are wondering if there is a stable money supply in place.  When the global economy was expanding, India's growth was approaching double digits. However, the economic slowdown in America spread across the world, and as a result, India's economic growth has faltered significantly.  In such a condition, a stable money supply enables nations to endure the difficult economic period and eventually manage until the expansion period emerges.  It is here in which a stable money supply is seen as essential.

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