Chapter 17.3

Question 1

Advantages of monetary union

Answer 1

Eliminates exchange rate risk and uncertainty
Encourages price transparency
Eliminates transaction costs
Promotes a higher level of inward investment
Low rates of inflation give rise to low interest rates, more investment, increased output

Question 2

Disadvantages of monetary union

Answer 2

Involves loss of domestic monetary policy as an instrument of economic policy
Monetary policy will impact differently on each member country
Involves loss of exchange rates as a mechanism for adjustment
Fiscal policy is constrained by convergence requirements
Involves loss of national governments’ authority in economic policy-making