Question

Why is price stability desirable? Why is interest rate stability desirable?

Answer 1

Price is a key indicator of economic health . Stability of price level is desirable to avoid prolonged inflation or deflation . Inflation erodes away the purchasing power of money and decline of real GDP . On the other hand def;ation causes slow growth and stagnation in the economy . So stability of price is essential to maintain a certain smooth growth level of the economy .

Interest rate is the cost of taking loans and the opportunity cost of consumption . Interest rate decides the amount of investment that will occur in the economy . it also decides the amount of savings that will occur in the economy . So stability of interest rate helps to maintain a certain level of private investment and savings volume in the economy . This is again essential for proper desired economic growth .