MACROECONOMIC INSTABILITY

Refer to a situation in which key economic relationships are not in balance. Examples include when domestic demand is higher than output or the government spends more than it earns in revenue. This leads to high inflation, growing trade and budget deficits and a rapidly expanding money supply. Macroeconomic instability is the result of ineffective government policies and changes in the international economy and has a devastating effect on economic development. For example, a loose fiscal policy can increase demand for goods and services, increasing the pressure on domestic prices and on the country’s external balance of payments.
In addition, to low growth rates, macroeconomic instability places a heavy burden on the poor. For example, inflation is a regressive and arbitrary tax which disproportionately affects poor people. This is because the poor tend to hold most of their financial assets in cash and because they are less able than the wealthy to protect their incomes and assets from inflation.