If money is to serve its good purpose its value must remain stable. Changes in value of money lead to harmful consequences in the economy at large.
Some broad effects of changes in value of money are traced below:
1. Price fluctuation implies that the value of money is unstable. This adversely affects the confidence in money as money fails to serve as a good store of value.
2. Even as a means of payments it loses its growth. It may also become a source of peril and confusion. Since prices of all goods do not change in the same order, the relative price structure is distorted.
When prices of necessaries tend to rise while those of luxuries may be falling, there is regressive effect, as the poor consumers suffer, while the rich are benefited while spending their money.
3. Price variations in product and factor markets are not uniform. Thus, the cost-functions and revenues in different categories of production differ. As a result, profitability of firms and industry tend to differ.
Marginal productivity of different factors in different uses never tends to be identical when the value of money fluctuates in segregated manner. This obstructs the optimal utilisation of resources. This may also cause maladjustment and wastefulness in the exploitation of country’s productive resources.
4. When value of money changes incoherently in different types of real and financial assets, assets portfolio management becomes a difficult task. It also distorts the pattern of wealth distribution and position of the wealth holders.
Say, for instance, when share prices fall but real estate prices rises, then person who has invested in shares is a looser while person occupying a real estate of the same amount is a gainer.
Such changes in different values of wealth due to unstable value of money distort the pattern of income distribution. Consequently, savings and investment may be adversely affected. It also disturbs business expectations and business planning. Business risks would be high when value of money in not stable.
5. Effects of rising prices in general inflation effects are also different from the effects of falling prices in general the deflation effects. Especially, tempo of growth process and economic development is disturbed due to instability in the value of money. It also adversely affects the course of economic planning and programming both at macro and micro levels.
In short, most of such harmful effects are indirectly by the menace of ‘inflation’ and ‘deflation.’ Inflation implies declining value of money. Deflation implies rising value of money.