9 Common Currency Areas Flashcards
1
Q
Benefits of a common currency
A
- reduced transaction costs
- less price discrimination
- eliminates exchange rate fluctuations
2
Q
Why is eliminating exchange rate fluctuations a positive?
A
It reduces uncertainty and allows business which are trading to plan for the long term
3
Q
Costs of a common currency
A
- giving up monetary policy freedom
- giving up the ability to make macroeconomic adjustments through the exchange rate
- one size fits all causes policy disagreements
4
Q
Optimum currency area
A
A group of counties for which fit is optimal to adopt a common currency (benefits>costs)
5
Q
Characteristics that reduce costs
A
- high degree of real wage flexibility
- high degree of labour mobility
- similarity in economies
- high degree of capital mobility
6
Q
Characteristics that increase benefits
A
High degree of integration will lead to great potential gain from transaction costs and exchange rate volatility
7
Q
Is EU an optimum currency area?
A
- there is high trade integration ✔️
- there is low labour and wage flexibility ❌
- financial crisis highlighted how one size fits all policy can be problematic ❌
8
Q
Why don’t richer EU countries want fiscal federalism?
A
Because they will be funding other countries with their taxes. They will also be charged higher interest rates for borrowing
