Chapter 17.3 Flashcards
Advantages of Monetary Union
What are some advantages of the monetary union?
-A single currency eliminates risk of uncertainty, thereby encouraging trade and investments across boundaries as well as better allocation of resources
-A single currency is able to eliminate transaction costs
-Price transperancy refers to the ability of consumers and firms ro compare all prices in all the countries that have adopted a common currency without making any conversions. This makes it easier for all economic decision makers to see price differences quickly and accurately across countries, promoting competition and efficiency
Disadvantages of Monetary Union
What are some disadvantages of the monetary union?
-A single currency involves the loss of monetary policy as an instrument of economic policy
-A single currency involves the loss of exchange rates as a mechanism for adjustment. It means that if a member country has a deficit with another member country, it wont be able to depreciate currency to correct imbalance
-Monetary policy pursued by single central bank impacts differently on each member country, depending on its own particular circumstances
