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Money System Instability

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Mathematical Basis on Strong Inherent Economic Instability

Economic instability involves changes that affect the normal workings of the economy. It

tends to reduce investor's confidence hence lower investments, spending, and growth rate, which

in turn leads to high unemployment rates (Holt, 1962). It's mainly caused by price changes and

can manifest in the form of inflation, recessions, busts, bond, and balance payment crisis (Holt,

1962). To understand these economic instabilities, Mathematics can be widely used in the

analysis of these factors. This is done through applications of mathematical methods and models

in the representation of theories and analysis of the problem at hand (Holt, 1962).

Economists apply mathematical knowledge in forming meaningful and testable hypotheses

about complex economic factors. These include problem optimization, static, comparative, and

dynamic analysis, among others (Holt, 1962). Through mathematical language, economists can

convert qualitative variables into a quantitative variable (Holt, 1962). This development

enhances the process of policymaking to understand and curb economic instabilities in a country.

Management of Money System Natural Instability

According to Dobija (2008), money system instability is caused by increased interest

rates, deterioration in the balance sheet of the financial and non-financial sector, and increased

uncertainties. Therefore, appropriate policies that can counteract these causes should be

implemented by a country to manage the instability of money system. For instance, monetary

policies whose main objectives are to maintain employment, achieve high economic growth

rates, and stabilization of prices and wages can be used. These policies include regulation of

money supply, open-market operations, and discount rates and can be implemented to ensure that

these objectives are achieved (Dobija, 2008). Fiscal policies can also be adopted as they have the
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effect of balancing the budget by increasing the difference between revenues and expenditures

(Dobija, 2008). This, in turn, raises the output hence stabilizing the budget and the entire

monetary system.

Reference List
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Dobija, M. (2008). Monetary Causes of the Financial System Instability. Cracow University of

Economics Working Paper no, 9.

KregeL, J. A. (2007). The natural instability of financial markets. Levy Economics Institute,

New York.

Holt, C. C. (1962). Liner decision rules for economic stabilization and growth. The Quarterly

Journal of Economics, 76(1), 20-56.

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