Currency Unions

Question 1

What does a currency union include

Answer 1

Shared currency

Shared central banks

Shared monetary policy

Question 2

Currency union

Answer 2

Agreement to use a single currency

Question 3

Which two countries use their own currency’s ?

Answer 3

Denmark and Sweden

Question 4

What is convergence criteria ?

Answer 4

Stable prices ,stable exchange rate , sound govement finance , Intrest rate comvergence

Question 5

What is one currency union ?

Answer 5

The euro

Question 6

Advantage of the euro

Answer 6

Reduces transaction costs (lost cost , profit reinvested , increasing exports)

Benefit of single European market and free trade

Encourages tourism (free movement of labour and capital)

Removes exchange rate flunctuations for many transactions encouraging exports to the EU and investment

Increases furans ability and willingness to invest

Along with larger markets makes it easier to exploit EOS

Question 7

Advantage of the euro

Answer 7

Anti inflationary discipline - removes devaluation as an instrument of economic policy

Price transparency

Trade creation (cheaper imports)

Job creation through increased trade

Question 8

Disadvantage of euro

Answer 8

Monetary convergence criteria does not mean full economic convergence

(Each countries has its own problems e.g inflation but don’t have control over monetary policy high and low capacity countries face same consequences )

Critics argue European Central Banks have deflationary bias (inflation target was not symmetrical until 2021)

Lack of fiscal discipline by some members lead to bailout low economy’s helped large economy’s (spending a lot not taxing a lot lead to large budget deficit )

Loss of economic sovereignty (ability to make own decisions about economy ) especially control over monetary policy high

One size fits all monetary policy doesn’t work

External shocks affect members asymmetrically currency cannot act as a ‘shock absorber’