Ch. 75 Monetary Unions

Question 1

What is the EMU of the EU?

Answer 1

The economic and monetary union.

Question 2

What are the four main jobs of the European Central bank (ECB)?

Answer 2

Distributes notes and coins

Sets interest rates

Responsible for maintaining a stable financial system (helps banks in difficulties in the EU)

Manages foreign currency reserves

Question 3

Seven advantages of the EMU?

Answer 3

PLEEMIT
Price transparency (better)
Long term agenda
Economies of scale (result of P and E)
Exchange rate costs reduced
Macroeconomic management
Inward investment
Trade increase (result of P and E)

Question 4

Explain how inward investment is an advantage of the EMU?

Answer 4

Countries in the EMU get external investors who want to be able to sell competitively to the EU. UK is not part of EMU therefore less investment.

Question 5

Explain how macroeconomic management is an advantage of the EMU and EV?

Answer 5

• The EMU sets guidelines (e.g. sizes of national debt and budget deficits) to prevent instability in the EU.

EV: supposed mismanagement since 2001 for high interest rates leading to high unemployment and low inflation.

Question 6

Explain what is meant by long-term agenda?

Answer 6

Economies of scale can lead to other benefits such as a political union or an EU army.

Question 7

Five disadvantages of EMU and EV for the last one?

Answer 7

STELL

• STRUCTURAL PROBLEMS (one size fits all doesn’t work well, made worse by no redistribution of income)
• TRANSITION COSTS (eg. New vending machines)
• EURO-ZONE BREAK UP (would also have transition costs)
• LOSS OF POLITICAL SOVEREIGNTY (leads to culture losses
• LOSS OF POLICY INDEPENDENCE (countries no longer can choose policy best for their region and issues) (EV: countries like Holland who export and import lots had already lost ability to control their policy)

Question 8

Interest rates are decided by the European Central bank. However individual countries can affect this by demanding lots of Euros. How is this problem solved?

Answer 8

Stability and Growth Pact:

• Annual budgets max. of 3% deficit.
• National debt

Question 9

Define monetary union?

Answer 9

When at least two countries share the same currency.